1. What is Compound Interest?

Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods. It causes wealth to grow faster than simple interest, which is calculated only on the principal amount.

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 including interest

Explanation: The formula accounts for exponential growth of your money over time as interest earns more interest.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for long-term savings and investment planning. Even small differences in interest rates can lead to significant differences in outcomes over time.

4. Using the Calculator

Tips: Enter the principal amount in dollars, annual interest rate as a percentage (e.g., 5 for 5%), and time period in 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 APR and APY?
A: APR (Annual Percentage Rate) doesn't account for compounding, while APY (Annual Percentage Yield) does. This calculator shows the effect of compounding.

Q3: How can I maximize compound interest?
A: Start early, contribute regularly, and seek higher interest rates when possible.

Q4: Are there limitations to this calculation?
A: This assumes a fixed interest rate and no additional deposits or withdrawals during the period.

Q5: How does inflation affect compound interest?
A: Inflation reduces the real value of your returns. Aim for interest rates that outpace inflation.