Investment Calculator Compound Interest

Compound Interest Formula:

\[ FV = P \times (1 + \frac{r}{comp})^{comp \times n} \]

Principal Amount (P):

USD

Annual Interest Rate (r):

decimal

Compounding Frequency (comp):

times per year

Investment Period (n):

years

Future Value (FV):

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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:

\[ FV = P \times (1 + \frac{r}{comp})^{comp \times n} \]

Where:

$ FV $ — Future value of the investment
$ P $ — Principal investment amount
$ r $ — Annual interest rate (in decimal)
$ comp $ — Number of compounding periods per year
$ n $ — Number of years the money is invested

Explanation: The more frequently interest is compounded, the greater the return on investment. Daily compounding yields more than monthly, which yields more than annual compounding.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for long-term financial planning. Even small differences in interest rates or compounding frequency can significantly impact investment growth over decades.

4. Using the Calculator

Tips: Enter principal in USD, annual rate as decimal (5% = 0.05), compounding frequency (12 for monthly), and investment 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 the principal plus accumulated interest.

Q2: How often do investments typically compound?
A: Common compounding periods are daily (365), monthly (12), quarterly (4), semi-annually (2), or annually (1).

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 at that rate.

Q4: How does compounding frequency affect returns?
A: More frequent compounding yields higher returns. $10,000 at 5% for 10 years: annually = $16,289, monthly = $16,470, daily = $16,486.

Q5: Can this calculator be used for debt?
A: Yes, the same formula applies to compound interest on loans or credit cards, showing how debt can grow over time.