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, where interest is calculated only on the principal amount.

2. How the Calculator Works

The calculator uses the compound interest formula:

Where:

• \( A \) — Future value of investment
• \( P \) — Principal investment amount
• \( r \) — Annual interest rate (decimal)
• \( n \) — Number of times interest is compounded per year
• \( t \) — Time the money is invested for (years)

Explanation: The more frequently interest is compounded, the greater the return, as interest is earned on interest more often.

3. Importance of Savings Calculation

Details: Understanding compound interest helps with financial planning, retirement savings, and comparing different investment options.

4. Using the Calculator

Tips: Enter principal amount in dollars, annual interest rate as 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 APR and APY?
A: APR (Annual Percentage Rate) doesn't account for compounding, while APY (Annual Percentage Yield) does.

Q2: How often should interest compound?
A: More frequent compounding (e.g., monthly vs. annually) yields better returns, though the difference may be small at lower rates.

Q3: 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 your money.

Q4: How does inflation affect savings?
A: Real return = nominal return - inflation. A 5% return with 3% inflation means a 2% real return.

Q5: Are there tax implications?
A: Interest earnings are often taxable, except in tax-advantaged accounts like IRAs or 401(k)s.