Home
Back
Compound Interest Formula:
| From: | To: |
The compound interest formula calculates the future value of an investment or loan 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 investment will grow when interest is compounded at regular intervals, showing the powerful effect of earning interest on previously earned interest.
Details: Understanding compound interest is essential for financial planning, investment decisions, and retirement savings. It helps individuals and businesses project future values and make informed financial choices.
Tips: Enter principal amount in USD, 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 from previous periods.
Q2: How does compounding frequency affect the result?
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 loans as well?
A: Yes, the same formula applies to both investments and loans, though for loans it shows how much you'll owe rather than earn.
Q5: How accurate are these calculations for real-world scenarios?
A: While the formula provides a mathematical projection, actual results may vary due to changing interest rates, fees, and other factors not accounted for in the basic calculation.