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:

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

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

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for financial planning, as it demonstrates how investments grow over time and helps compare different savings options.

4. Using the Calculator

Tips: Enter principal amount in dollars, annual interest rate in percentage, and number of months. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: How often is interest compounded in this calculator?
A: This calculator assumes monthly compounding, which is common for savings accounts.

Q2: What's the difference between annual and monthly compounding?
A: Monthly compounding yields slightly higher returns because interest is calculated and added more frequently.

Q3: How does changing the compounding frequency affect results?
A: More frequent compounding (e.g., daily vs monthly) results in slightly higher returns due to the exponential effect.

Q4: Can I use this for loans or credit cards?
A: While the formula is similar, loans typically use daily compounding. For accurate loan calculations, use a specialized loan calculator.

Q5: What's the rule of 72 in compound interest?
A: The rule of 72 estimates how long it takes to double your money (72 divided by the interest rate).