1. What is Compound Interest?

Compound interest is the addition of interest to the principal sum of a loan or investment, where the interest that has been added also earns interest. This differs from simple interest, where only the principal earns interest.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( Principal \) — Initial investment amount
• \( Rate \) — Annual interest rate (as decimal)
• \( Compounding\ Periods \) — Number of times interest is compounded per year
• \( Years \) — Length of investment in years

Explanation: The formula accounts for exponential growth of your investment through periodic compounding of interest.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for long-term investment planning. It demonstrates how investments grow exponentially over time, especially when dividends are reinvested.

4. Using the Calculator

Tips: Enter principal in dollars, annual rate as percentage (e.g., 7 for 7%), compounding frequency (typically 12 for monthly), and investment duration in years.

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 often should interest compound for maximum growth?
A: More frequent compounding (daily > monthly > yearly) results in slightly higher returns due to the exponential effect.

Q3: How does this apply to stock investments?
A: When dividends are reinvested, they can compound similarly to interest, especially in dividend growth stocks or DRIP plans.

Q4: What's a realistic annual return rate for stocks?
A: Historically, the S&P 500 has returned about 7% annually after inflation, but returns vary yearly.

Q5: How important is the principal amount?
A: The principal is crucial - doubling your initial investment will double your final amount, all else being equal.