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Compound Interest Formula:
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The compound interest formula calculates the future value of an investment or savings account based on the principal amount, interest rate, compounding frequency, and time period. It demonstrates how money grows over time through the power of compounding.
The calculator uses the compound interest formula:
Where:
Explanation: The formula calculates how much your initial investment will grow based on the interest earned and how frequently that interest is compounded.
Details: Understanding future value helps in financial planning, comparing savings accounts, and making informed investment decisions to maximize returns over time.
Tips: Enter principal amount in GBP, annual interest rate as a percentage, number of compounding periods per year, and time in years. All values must be positive numbers.
Q1: What's the difference between simple and compound interest?
A: Simple interest is calculated only on the principal amount, while compound interest is calculated on both the principal and accumulated interest, leading to faster growth.
Q2: How does compounding frequency affect returns?
A: More frequent compounding (monthly vs annually) results in higher returns because interest is calculated and added to the principal more often.
Q3: What are typical compounding periods for savings accounts?
A: Most savings accounts compound interest daily, monthly, quarterly, or annually. Check with your financial institution for specific details.
Q4: Can I use this for regular contributions?
A: This calculator assumes a single lump sum investment. For regular contributions, you would need a different formula that accounts for periodic deposits.
Q5: Are there any taxes on interest earned?
A: Yes, interest earned on savings is typically subject to income tax, though some accounts like ISAs offer tax-free savings up to certain limits.