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Compound Interest Formula:
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The compound interest formula calculates the future value of an investment or loan where interest is added to the principal, so that interest also earns interest in subsequent periods. This is known as compounding.
The calculator uses the compound interest formula:
Where:
Explanation: The formula calculates how much your initial investment will grow over time with compound interest, which is interest calculated on both the initial principal and the accumulated interest from previous periods.
Details: Understanding compound interest is crucial for financial planning, savings strategies, and investment decisions. It demonstrates how money can grow over time and helps individuals make informed decisions about their finances.
Tips: Enter the principal amount in pounds (£), annual interest rate as a percentage, and time period in years. All values must be valid (principal > 0, rate ≥ 0, time > 0).
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 both the principal and accumulated interest.
Q2: How often is interest compounded in this calculator?
A: This calculator assumes annual compounding. For different compounding frequencies, the formula would need to be adjusted.
Q3: Is this calculator specific to UK financial products?
A: While designed with UK users in mind, the compound interest formula is universal. However, always check the specific terms of your savings account or investment.
Q4: Can I use this for loan calculations?
A: Yes, the same formula applies to loans with compound interest, though most UK consumer loans use different calculation methods.
Q5: How accurate is this calculator for real-world savings?
A: This provides a theoretical calculation. Actual returns may vary based on specific account terms, tax implications, and changing interest rates.