1. What is Compound Interest?

Compound interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods. It's often called "interest on interest" and makes savings grow at a faster rate compared to simple interest.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( PV \) — Present value or principal amount (USD)
• \( r \) — Interest rate per period (decimal)
• \( n \) — Number of periods (years)

Explanation: The formula calculates how much your money grows when interest is earned on both the principal and accumulated interest.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for financial planning, as it demonstrates how investments grow over time and the true cost of borrowing money.

4. Using the Calculator

Tips: Enter the principal amount in USD, interest rate as a decimal (e.g., 0.05 for 5%), and number of 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 any accumulated interest.

Q2: How often is interest compounded in this calculator?
A: This calculator assumes annual compounding. For different compounding periods, the formula would need adjustment.

Q3: What's the Rule of 72?
A: It's a quick way to estimate how long it takes for an investment to double (72 divided by the interest rate).

Q4: Why does compound interest matter for savings?
A: Over long periods, compound interest can significantly increase your savings due to exponential growth.

Q5: How can I maximize compound interest?
A: Start early, save regularly, and seek higher (but safe) interest rates to maximize the power of compounding.