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Compound Interest Equation:
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The compound interest equation calculates how an investment grows when interest is earned on both the initial principal and the accumulated interest from previous periods. This differs from simple interest where interest is only calculated on the original principal.
The calculator uses the compound interest equation:
Where:
Explanation: The equation accounts for exponential growth of money through repeated application of interest to both principal and accumulated interest.
Details: Understanding compound interest is crucial for financial planning, investment decisions, and comparing different savings or loan options.
Tips: Enter principal in dollars, annual interest rate as percentage, number of compounding periods per year, and investment period in years. All values must be positive numbers.
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 any 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 include annually (1), semi-annually (2), quarterly (4), monthly (12), weekly (52), or daily (365).
Q4: Can this calculator be used for loans?
A: Yes, the same formula applies to loans where interest compounds, though most consumer loans use simple interest.
Q5: What's the Rule of 72?
A: A quick way to estimate doubling time: 72 divided by the interest rate gives approximate years to double your money at that rate.