1. What is Compound Interest?

Compound interest is the addition of interest to the principal sum of a loan or deposit, where the interest that has been added also earns interest. This differs from simple interest, where interest is not compounded.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( Principal \) — Initial investment amount
• \( Rate \) — Annual interest rate (in decimal form)
• \( Years \) — Time period in years

Explanation: The formula calculates how much an investment will grow when interest is earned on both the initial principal and the accumulated interest from previous periods.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for financial planning, as it demonstrates how investments grow over time and highlights the value of starting to save early.

4. Using the Calculator

Tips: Enter the principal amount in dollars, the annual interest rate as a percentage, and the number of 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 annual compounding, meaning interest is calculated once 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 the principal plus any 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 occurring more often.

Q4: What is the "Rule of 72"?
A: It's a simple way to estimate how long an investment will take to double: divide 72 by the annual interest rate.

Q5: Can this calculator be used for loans?
A: Yes, it can calculate the future value of loans with compound interest, though most loans use monthly compounding.