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Compound Interest Formula:
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The compound interest formula calculates the future value of savings by accounting for interest earned on both the initial principal and the accumulated interest from previous periods. It provides a more accurate representation of savings growth over time compared to simple interest.
The calculator uses the compound interest formula:
Where:
Explanation: The formula calculates how much your savings will grow based on the principal amount, interest rate, compounding frequency, and time period.
Details: Understanding compound interest is crucial for financial planning, savings growth projections, and making informed investment decisions. It demonstrates how money can grow exponentially 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: Are there UK tax implications on savings interest?
A: Yes, interest earned on savings may be subject to tax depending on your personal savings allowance and tax band.
Q4: What's a typical interest rate for UK savings accounts?
A: Rates vary by account type and economic conditions, typically ranging from 0.5% to 5% for standard savings accounts.
Q5: Can this calculator be used for investments other than savings?
A: While the formula applies to any compound growth scenario, specific investments may have additional factors to consider.