Question 1

What is compound interest?

Accepted Answer

Compound interest is interest calculated on the initial principal and also on the accumulated interest from previous periods. It's 'interest on interest' and can significantly increase your investment returns over time.

Question 2

How is compound interest calculated?

Accepted Answer

The compound interest formula is A = P(1 + r/n)^(nt), where A is the final amount, P is the principal, r is the annual interest rate, n is the number of times interest compounds per year, and t is the time in years.

Question 3

What does compounding frequency mean?

Accepted Answer

Compounding frequency refers to how often interest is calculated and added to the principal. Common frequencies are annually (1), semi-annually (2), quarterly (4), monthly (12), or daily (365). More frequent compounding generally results in higher returns.

Question 4

Should I include regular contributions?

Accepted Answer

Yes! Regular contributions (like monthly investments) can dramatically increase your final amount due to the power of compound interest. Even small regular contributions can lead to substantial growth over time.

Question 5

How does compound interest differ from simple interest?

Accepted Answer

Simple interest is calculated only on the principal amount, while compound interest is calculated on the principal plus any previously earned interest. Over time, compound interest grows much faster than simple interest.

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Frequently Asked Questions

What is compound interest?

How is compound interest calculated?

What does compounding frequency mean?

Should I include regular contributions?

How does compound interest differ from simple interest?