What is Compound Interest?
Compound interest is the process where interest is added to the principal amount, so that from that moment on, the interest that has been added also earns interest. This effect causes your wealth to grow faster than with simple interest, where only the principal earns interest.
Compound Interest Formula
A = P(1 + r/n)nt
- P = Initial principal balance
- r = Annual interest rate (in decimal)
- n = Number of times interest applied per time period
- t = Number of time periods the money is invested for
Benefits of Compound Interest
Compound interest can grow your investments at a much faster rate compared to simple interest. The longer you leave your money invested, the more you benefit due to compounding. It's ideal for wealth accumulation over time.
How to Use the Compound Interest Calculator
Enter your initial investment (principal), annual interest rate, number of years you plan to invest, and compounding frequency (e.g., monthly, quarterly). The calculator will compute your future value including total interest earned.
Frequently Asked Questions (FAQs)
What is compound interest?
Compound interest is the interest you earn not only on your initial principal but also on the accumulated interest from previous periods.
How often is interest compounded?
Depending on the investment, interest may be compounded annually, semi-annually, quarterly, monthly, or daily. More frequent compounding results in higher returns.
Why is compound interest important in financial planning?
It allows your investments to grow exponentially over time, making it essential for long-term financial goals like retirement and education.