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Compound Interest Formula:
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Compound interest is the interest calculated on the initial principal and also on the accumulated interest of previous periods. It allows savings to grow at a faster rate than simple interest, which is calculated only on the principal amount.
The calculator uses the compound interest formula:
Where:
Explanation: The formula shows how money grows over time when earnings are reinvested to earn additional returns.
Details: Understanding compound interest is crucial for financial planning. It demonstrates the power of time in investing and the importance of starting to save early.
Tips: Enter the principal amount in USD, interest rate as a decimal (e.g., 0.05 for 5%), and time period in years. All values must be positive numbers.
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 is interest compounded in this calculator?
A: This calculator assumes annual compounding. For other compounding periods, the formula would need adjustment.
Q3: What's a good interest rate for savings?
A: This depends on economic conditions. Historically, savings accounts offer 1-3%, while long-term stock market returns average about 7-10% annually.
Q4: How does inflation affect these calculations?
A: Inflation reduces the real purchasing power of your returns. For accurate planning, consider real returns (nominal return minus inflation rate).
Q5: Can I use this for monthly contributions?
A: No, this calculator is for lump sum investments. For regular contributions, you'd need a different formula that accounts for periodic deposits.