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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 by accounting for interest earned on both the initial principal and accumulated interest over time. It provides a more accurate projection of savings growth compared to simple interest calculations.
The calculator uses the compound interest formula:
Where:
Explanation: The formula calculates how much your initial investment will grow based on the interest rate, compounding frequency, and time period.
Details: Understanding future value helps in financial planning, savings goal setting, and comparing different investment options. It demonstrates the power of compounding over time.
Tips: Enter principal amount in GBP, annual interest rate as a decimal (e.g., 0.05 for 5%), 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 calculates interest 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 and added more often.
Q3: What are typical compounding periods?
A: Common compounding frequencies include annually (1), semi-annually (2), quarterly (4), monthly (12), and daily (365).
Q4: Can this calculator be used for loans and debts?
A: Yes, the same formula applies to compound interest on debts, though the context and implications are different from savings.
Q5: How accurate are these calculations for real-world savings?
A: While mathematically accurate, actual returns may vary due to changing interest rates, fees, taxes, and other factors not accounted for in this basic calculation.