Savings Interest Calculator

Compound Interest Formula:

\[ A = P \times \left(1 + \frac{r}{n}\right)^{nt} \]

Principal Amount (P):

Annual Interest Rate (r):

Time (t):

years

Compounds Per Year (n):

Future Amount (A):

Total Interest Earned:

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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:

\[ A = P \times \left(1 + \frac{r}{n}\right)^{nt} \]

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 formula accounts for exponential growth as each compounding period adds more interest to both the principal and previously earned interest.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for financial planning, retirement savings, and investment strategies. It demonstrates how small, regular investments can grow significantly over time.

4. Using the Calculator

Tips: Enter principal in dollars, annual interest rate as a percentage (e.g., 5 for 5%), time in years, and select compounding frequency. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: 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 the principal plus accumulated interest.

Q2: How does compounding frequency affect returns?
A: More frequent compounding (e.g., monthly vs. annually) results in higher returns due to interest being calculated on interest more often.

Q3: What's the "Rule of 72"?
A: A quick way to estimate how long it takes money to double: divide 72 by the interest rate. At 6% interest, money doubles in about 12 years.

Q4: Are there limitations to this calculation?
A: This assumes a fixed interest rate and no additional deposits/withdrawals. Real-world returns may vary due to changing rates and market conditions.

Q5: How can I maximize compound interest benefits?
A: Start early, invest regularly, reinvest dividends/interest, and choose accounts with higher compounding frequencies.