1. What is Compound Interest?

Compound interest is the interest calculated on the initial principal and also on the accumulated interest of previous periods. It's often described as "interest on interest" and can help savings grow at a faster rate compared to simple interest.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( A \) — Total amount after interest (£)
• \( P \) — Principal amount (£)
• \( r \) — Annual interest rate (decimal)
• \( t \) — Time in years

Explanation: The formula calculates how much your initial investment will grow over time with compound interest, showing the power of compounding.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for long-term financial planning, savings growth, and investment strategies. It demonstrates how money can grow exponentially over time.

4. Using the Calculator

Tips: Enter the principal amount in pounds, annual interest rate as a percentage, and time period 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 both the principal and accumulated interest.

Q2: How often is interest typically compounded?
A: Interest can be compounded annually, semi-annually, quarterly, monthly, or daily. This calculator assumes annual compounding.

Q3: Why is compound interest called the eighth wonder of the world?
A: Because it allows money to grow exponentially over time, turning small, regular investments into substantial sums.

Q4: How does compounding frequency affect returns?
A: More frequent compounding (monthly vs. annually) results in higher returns because interest is calculated and added more often.

Q5: Can compound interest work against me?
A: Yes, when borrowing money, compound interest can cause debt to grow rapidly if not managed properly.