1. What is the Compound Interest Formula?

The compound interest formula calculates the future value of an investment or loan where interest is compounded over time. It shows how money grows exponentially when earnings are reinvested.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( A \) — Final amount ($)
• \( P \) — Principal amount ($)
• \( r \) — Interest rate (decimal)
• \( t \) — Time period (years)

Explanation: The formula calculates how an initial investment grows over time when interest is compounded annually.

3. Importance of Compound Interest Calculation

Details: Understanding compound interest is crucial for financial planning, investment decisions, retirement savings, and loan management. It demonstrates the power of time and compounding in wealth building.

4. Using the Calculator

Tips: Enter principal amount in dollars, interest rate as a decimal (e.g., 0.05 for 5%), 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 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 adjustment.

Q3: Can I use this for monthly calculations?
A: For monthly calculations, convert the annual rate to monthly (divide by 12) and time to months (multiply by 12).

Q4: What's the rule of 72?
A: The rule of 72 estimates how long it takes for an investment to double: 72 divided by the interest rate gives approximate years.

Q5: How does compounding frequency affect results?
A: More frequent compounding (monthly, daily) results in higher returns due to interest being calculated on accumulated interest more often.