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
• \( P \) — Principal Amount
• \( r \) — Annual Interest Rate (as decimal)
• \( t \) — Time in Years

Explanation: The formula calculates how much an investment will grow when interest is compounded annually. The power of compounding accelerates growth over longer time periods.

3. Importance of Compound Growth

Details: Compound growth is fundamental to long-term investing success. It allows investments to grow exponentially rather than linearly, making it one of the most powerful concepts in finance.

4. Using the Calculator

Tips: Enter the initial investment amount in dollars, annual interest rate as a percentage, and the investment 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 principal and accumulated interest.

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

Q3: What is a typical investment return rate?
A: Historical stock market returns average 7-10% annually, while bonds typically return 3-5%. Actual returns vary based on investment type and market conditions.

Q4: Can I use this for monthly investments?
A: This calculator is for single lump-sum investments. For regular contributions, a different formula is needed.

Q5: How does inflation affect these calculations?
A: The results show nominal returns. For real returns (adjusted for inflation), subtract the inflation rate from the interest rate.