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 called "interest on interest" and can significantly grow wealth over time.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( A \) — Final amount
• \( P \) — Principal amount (initial investment)
• \( R \) — Periodic interest rate (annual rate divided by compounding periods)
• \( N \) — Total number of compounding periods (years × frequency)

Explanation: The formula accounts for exponential growth of money by applying interest to both the principal and accumulated interest.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for financial planning, investment decisions, and retirement savings. It demonstrates how money can grow over time with consistent investment.

4. Using the Calculator

Tips: Enter principal amount in dollars, annual interest rate in percentage, time in years, and select compounding frequency. 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 principal plus accumulated interest.

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

Q3: What's a typical compounding frequency for savings accounts?
A: Most savings accounts compound interest daily or monthly.

Q4: Can this calculator be used for debt?
A: Yes, it works the same way for loans and credit cards where interest compounds on outstanding balances.

Q5: How accurate is this calculator for real investments?
A: It provides theoretical results assuming constant rate. Actual investments may vary due to rate changes, fees, and taxes.