1. What is the Compound Interest Formula?

The compound interest formula calculates how much an investment will grow over time when earnings are reinvested. It's a key concept in personal finance and wealth building, as emphasized by Dave Ramsey.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( Principal \) — Initial investment amount
• \( Rate \) — Annual interest rate (as decimal)
• \( Years \) — Number of years invested
• \( FV \) — Future value of the investment

Explanation: The formula shows exponential growth because you earn "interest on interest" over time.

3. Importance of Compound Interest

Details: Compound interest is the most powerful force in wealth building. Even small, regular investments can grow substantially over decades due to compounding.

4. Using the Calculator

Tips: Enter the principal amount in dollars, annual interest rate as a percentage (e.g., 7 for 7%), and number of years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: How does this differ from simple interest?
A: Simple interest calculates earnings only on the principal. Compound interest calculates earnings on both principal and accumulated interest.

Q2: What's a typical rate of return for investments?
A: Historically, the stock market averages about 7% annual return after inflation. Dave Ramsey often uses this figure for retirement planning.

Q3: How often is interest compounded in this calculator?
A: This calculator assumes annual compounding, which is standard for long-term investment projections.

Q4: Why does Dave Ramsey emphasize compound interest?
A: It demonstrates the power of consistent, long-term investing and starting early - key principles of his Baby Steps program.

Q5: Can I use this for debt calculations?
A: While the math is similar, this calculator is designed for investment growth. For debt, you'd want an amortization calculator.