1. What is the Compound Interest Formula?

The compound interest formula calculates how much your money will grow over time when interest is compounded monthly. This is particularly useful for Certificates of Deposit (CDs) which typically compound interest.

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)
• \( A \) — Final amount after interest

Explanation: The formula accounts for interest being earned on both the principal and previously accumulated interest.

3. Importance of Compound Interest Calculation

Details: Understanding compound interest helps investors compare CD offerings and predict their investment growth over time.

4. Using the Calculator

Tips: Enter the principal amount in dollars, annual interest rate as a percentage, and term in months. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: How often is interest compounded on CDs?
A: Most CDs compound interest daily or monthly, but this calculator assumes monthly compounding per NerdWallet's methodology.

Q2: What's the difference between simple and compound interest?
A: Simple interest is calculated only on the principal, while compound interest is calculated on principal plus accumulated interest.

Q3: Are CD interest rates fixed or variable?
A: Traditional CDs have fixed rates, but some special CDs may have variable rates.

Q4: Are there penalties for early withdrawal?
A: Yes, most CDs charge a penalty for withdrawing funds before the maturity date.

Q5: How does this compare to other investments?
A: CDs are lower risk but typically offer lower returns than stocks or bonds, making them good for short-term savings goals.