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:

• \( P \) — Principal amount (initial investment)
• \( r \) — Annual interest rate (as a decimal)
• \( n \) — Number of compounding periods (years)

Explanation: The formula calculates how much your initial investment will grow when interest is compounded annually over a specified number of years.

3. Importance of Compound Interest

Details: Compound interest is one of the most powerful concepts in finance. It allows investments to grow exponentially over time, making it crucial for retirement planning, long-term savings, and wealth building.

4. Using the Calculator

Tips: Enter the principal amount in dollars, annual interest rate as a percentage (e.g., 5 for 5%), and the number of years for compounding. 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 the principal and accumulated interest.

Q2: How often is interest compounded in this calculator?
A: This calculator assumes annual compounding. For different compounding frequencies, the formula would need adjustment.

Q3: What is the Rule of 72?
A: The Rule of 72 estimates how long it takes for an investment to double: 72 ÷ interest rate = years to double.

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 can I maximize compound interest benefits?
A: Start investing early, contribute regularly, and choose investments with competitive returns to maximize compounding effects.