Compound Interest Calculator for Investments

Compound Interest Formula:

\[ FV = Principal \times (1 + \frac{Rate}{Compounding\ Periods})^{(Compounding\ Periods \times Years)} \]

Principal Amount:

Annual Interest Rate:

Compounding Periods per Year:

Investment Years:

Future Value:

Unit Converter ▲

Unit Converter ▼

From:	To:

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:

\[ FV = Principal \times (1 + \frac{Rate}{Compounding\ Periods})^{(Compounding\ Periods \times Years)} \]

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 more frequently interest is compounded, the greater the return on investment due to the exponential growth effect.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for long-term financial planning. It demonstrates how investments grow over time and the power of starting early with regular contributions.

4. Using the Calculator

Tips: Enter the principal amount in dollars, annual interest rate as a percentage (e.g., 5 for 5%), number of compounding periods per year (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 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 are typical compounding periods?
A: Common periods are annually (1), semi-annually (2), quarterly (4), monthly (12), weekly (52), or daily (365).

Q4: Can this calculator account for regular contributions?
A: No, this calculates compound interest on a single principal amount. For regular contributions, you'd need a future value of annuity calculator.

Q5: Why is compound interest important for retirement planning?
A: Over long periods, compound growth can significantly multiply initial investments, making early and consistent saving particularly powerful.