1. What is Compound Interest?

Compound interest is the addition of interest to the principal sum of a loan or deposit, where the interest that has been added also earns interest. This differs from simple interest, where interest is not compounded.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( A \) — Final amount
• \( P \) — Principal amount (initial investment)
• \( R \) — Monthly interest rate (annual rate divided by 12)
• \( N \) — Number of compounding periods (months)

Explanation: The formula calculates how much your investment will grow when interest is compounded monthly.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for financial planning. It helps investors see how their money can grow over time and demonstrates the power of starting to save early.

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 months you plan to save. 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 the principal plus any accumulated interest.

Q2: How often is interest compounded in this calculator?
A: This calculator assumes monthly compounding, which is common for savings accounts.

Q3: Does this account for additional deposits?
A: No, this calculator only shows growth from a single initial deposit. For regular contributions, you'd need a different formula.

Q4: Why is compound interest beneficial for savers?
A: It allows your money to grow faster because you earn interest on both your original money and on the interest you accumulate.

Q5: How accurate is this calculator?
A: It provides a mathematical projection based on constant rates. Actual bank accounts may have varying rates or different compounding schedules.