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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 can grow 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, setting savings goals, and comparing different investment options. It shows the potential growth of your money over time.
Tips: Enter the 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.
Q2: How does compounding frequency affect returns?
A: More frequent compounding (e.g., monthly vs annually) results in higher returns due to interest being calculated on previously earned interest more often.
Q3: Are there tax implications on earned interest?
A: In the UK, interest earned on savings may be subject to tax depending on your personal savings allowance and income tax band.
Q4: What's a typical interest rate for UK savings accounts?
A: Interest rates vary by account type and provider. Easy-access accounts typically offer lower rates than fixed-term accounts.
Q5: Should I consider inflation in my calculations?
A: Yes, for long-term planning, consider real returns (nominal return minus inflation) to understand your actual purchasing power growth.