1. What is Compound Interest?

Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods. It allows savings to grow at a faster rate than simple interest, especially over long time periods.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( Principal \) — Initial investment amount
• \( Rate \) — Annual interest rate (as percentage)
• \( Time \) — Investment period in years
• \( FV \) — Future value of the investment

Explanation: The formula accounts for monthly compounding by dividing the annual rate by 12 and multiplying the time period by 12.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for financial planning, retirement savings, and investment decisions. It demonstrates how money can grow exponentially over time.

4. Using the Calculator

Tips: Enter principal amount in dollars, annual interest rate as a percentage (e.g., 5 for 5%), and time period in years. 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 (12 times per year).

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

Q3: How does compounding frequency affect returns?
A: More frequent compounding (e.g., monthly vs. annually) results in higher returns due to the "interest on interest" effect.

Q4: Can I use this for debt calculations?
A: Yes, the same formula applies to debt that compounds, though you'd interpret the result as the total amount owed.

Q5: Why is time the most important factor?
A: Compound interest works best over long periods because the growth becomes exponential as interest earns its own interest.