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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's often referred to as "interest on interest" and can cause wealth to grow exponentially over time.
The calculator uses the compound interest formula:
Where:
Explanation: The formula calculates how much an investment will grow over time when interest is compounded at regular intervals.
Details: Compound interest is a powerful financial concept that allows investments to grow exponentially over time. It's fundamental to retirement planning, long-term savings, and understanding the true cost of debt.
Tips: Enter the principal amount in dollars, interest rate as a percentage (e.g., 5 for 5%), and the number of compounding periods. 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 both the principal and accumulated interest.
Q2: How often should interest compound for maximum growth?
A: The more frequently interest compounds, the faster your money grows. Daily compounding yields slightly more than monthly, which yields more than annually.
Q3: Can compound interest work against me?
A: Yes, when you have debt with compound interest, the amount you owe can grow rapidly if not paid down consistently.
Q4: What is the Rule of 72?
A: It's a simple way to estimate how long an investment will take to double: Divide 72 by the annual interest rate. For example, at 6% interest, your money will double in about 12 years.
Q5: Does this calculator account for additional contributions?
A: No, this calculator only calculates compound interest on a single initial investment. For recurring contributions, you would need a different formula.