1. What is Compound Interest?

Compound interest is the interest calculated on the initial principal and also on the accumulated interest of previous periods. It's often described as "interest on interest" and can cause wealth to grow exponentially over time.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( FV \) — Future value of the investment
• \( P \) — Principal investment amount
• \( r \) — Annual interest rate (in decimal form)
• \( t \) — Time the money is invested for (in years)

Explanation: The formula calculates how much an investment will grow over time when interest is compounded annually.

3. Importance of Compound Interest

Details: Compound interest is a powerful concept in finance that allows investments to grow exponentially over time. Understanding compound interest helps in making informed decisions about savings and investments for long-term financial goals.

4. Using the Calculator

Tips: Enter the principal amount in dollars, annual interest rate as a percentage (e.g., 5 for 5%), and time period in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: How does compound interest differ from simple 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 often is interest compounded in this calculator?
A: This calculator assumes annual compounding, meaning interest is calculated and added to the principal once per year.

Q3: Can I use this calculator for monthly compounding?
A: No, this calculator is specifically designed for yearly compounding. For monthly compounding, a different formula would be needed.

Q4: What's the rule of 72 in compound interest?
A: The rule of 72 is a quick way to estimate how long it takes for an investment to double: divide 72 by the annual interest rate.

Q5: How does inflation affect compound interest calculations?
A: This calculator doesn't account for inflation. For real returns, you would need to subtract the inflation rate from the interest rate.