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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 an initial investment will grow over time with compound interest, where interest is earned on both the principal and accumulated interest.
Details: Calculating future value helps individuals and businesses plan for financial goals, compare investment options, and understand the long-term impact of compounding on savings and investments.
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 is calculated on both the principal and accumulated interest, leading to exponential growth.
Q2: How does compounding frequency affect returns?
A: More frequent compounding (e.g., monthly vs. annually) results in higher returns because interest is calculated and added to the principal more often.
Q3: What are typical compounding frequencies?
A: Common frequencies include annually (1), semi-annually (2), quarterly (4), monthly (12), and daily (365).
Q4: Can this calculator be used for different currencies?
A: While the formula works for any currency, this calculator is specifically designed for GBP. The principles apply universally, but currency symbols would need adjustment.
Q5: How accurate is this calculation for real-world savings?
A: This provides a mathematical estimate. Actual returns may vary due to changing interest rates, fees, taxes, and other factors not accounted for in the basic formula.