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 (currency)
• \( PV \) — Present Value (currency)
• \( r \) — Interest Rate (decimal)
• \( n \) — Number of Periods (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 fundamental to personal finance and investing. It demonstrates the power of time in wealth accumulation and is crucial for retirement planning, savings goals, and investment strategies.

4. Using the Calculator

Tips: Enter present value in currency units, interest rate as a decimal (e.g., 0.05 for 5%), and number of years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

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 principal and accumulated interest.

Q2: How does compounding frequency affect results?
A: More frequent compounding (monthly vs. annually) results in higher returns due to interest being calculated more often.

Q3: What is the Rule of 72?
A: A quick way to estimate how long it takes for an investment to double: 72 divided by the interest rate percentage.

Q4: Can compound interest work against me?
A: Yes, when borrowing money, compound interest can cause debt to grow rapidly if not managed properly.

Q5: How important is starting early with investing?
A: Extremely important. Starting early gives your money more time to compound, significantly increasing potential returns.