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.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( FV \) — Future Value
• \( PV \) — Present Value (initial investment)
• \( r \) — Annual interest rate (in decimal)
• \( n \) — Number of compounding periods per year
• \( t \) — Time in years

Explanation: The formula accounts for periodic compounding, where interest is added to the principal at regular intervals.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for financial planning, investments, and loans. It demonstrates how money can grow over time.

4. Using the Calculator

Tips: Enter present value in USD, annual interest rate as decimal (e.g., 0.05 for 5%), compounding frequency (e.g., 12 for monthly), and time in years.

5. Frequently Asked Questions (FAQ)

Q1: How does compounding frequency affect results?
A: More frequent compounding leads to higher returns. Daily compounding yields more than annual compounding.

Q2: What's the difference between APR and APY?
A: APR doesn't account for compounding, while APY does. APY gives the true annual return.

Q3: How can I maximize compound interest?
A: Start early, invest regularly, choose higher compounding frequencies, and reinvest dividends/interest.

Q4: What's the Rule of 72?
A: A quick way to estimate doubling time: 72 divided by the interest rate gives approximate years to double.

Q5: How does inflation affect compound interest?
A: Inflation reduces real returns. Always consider real (inflation-adjusted) returns for long-term planning.