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 cause wealth to grow exponentially over time.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( FV \) — Future Value (currency)
• \( P \) — Principal Amount (currency)
• \( r \) — Annual Interest Rate (decimal)
• \( t \) — Time Period (years)

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

3. Importance of Compound Interest

Details: Compound interest is a fundamental concept in finance that demonstrates the power of long-term investing. It's crucial for retirement planning, investment strategies, and understanding the time value of money.

4. Using the Calculator

Tips: Enter the principal amount in dollars, annual interest rate as a decimal (5% = 0.05), 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 compounded in this calculator?
A: This calculator assumes annual compounding. For different compounding frequencies, the formula would need adjustment.

Q3: What is a typical annual interest rate for investments?
A: Rates vary widely by investment type: savings accounts (0.5-2%), bonds (2-5%), stocks (7-10% historical average).

Q4: Can I use this for loans and debts?
A: Yes, the same principle applies to loans where interest compounds on outstanding balances.

Q5: How does inflation affect these calculations?
A: This calculator shows nominal returns. For real returns, subtract inflation rate from the interest rate.