Compound Interest Formula in Calculator

Compound Interest Formula:

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

Principal Amount:

Annual Interest Rate:

Compounding Periods:

per year

Time Period:

years

Future Value:

Unit Converter ▲

Unit Converter ▼

From:	To:

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 because you earn interest on interest.

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
\( Years \) — Time money is invested for
\( FV \) — Future value of the investment

Explanation: The more frequently interest is compounded, the greater the return due to the exponential effect of compounding.

3. Importance of Compound Interest

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

4. Using the Calculator

Tips: Enter principal in dollars, annual rate as percentage (e.g., 5 for 5%), compounding periods per year (e.g., 12 for monthly), and time in years. 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 principal plus accumulated interest.

Q2: How does compounding frequency affect returns?
A: More frequent compounding (daily vs. annually) results in higher returns due to the exponential growth effect.

Q3: 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.

Q4: Can compound interest work against you?
A: Yes, with loans/debt, compound interest can cause what you owe to grow rapidly over time.

Q5: How important is time in compounding?
A: Extremely important. Starting early allows more time for compounding to work, often making a bigger difference than the amount invested.