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Compound Interest Calculator

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Understanding Compound Interest

Compound interest is often called the "eighth wonder of the world" for good reason. It's the interest you earn on both the money you've saved and the interest you've already earned. Unlike simple interest, which is calculated only on the principal amount, compound interest allows your money to grow exponentially over time.

How Compound Interest Works

Imagine you invest $1,000 at a 5% annual interest rate. With simple interest, you'd earn $50 each year. After 10 years, you'd have $1,500. With compound interest, however, the interest earned in the first year ($50) is added to your principal, so in the second year, you earn interest on $1,050. This cycle continues, leading to significantly higher returns over longer periods.

The key factors influencing compound interest growth are:

  • Initial Investment: The starting amount of money you put in.
  • Annual Interest Rate: The percentage return your investment earns per year.
  • Compounding Frequency: How often the interest is calculated and added to your principal (e.g., annually, semi-annually, quarterly, monthly, or daily). More frequent compounding generally leads to faster growth.
  • Investment Period: The length of time your money remains invested. The longer the period, the more time compound interest has to work its magic.
  • Regular Additional Contributions: Consistently adding money to your investment significantly boosts its future value, as these contributions also start earning compound interest.

The Power of Time and Frequency

This calculator demonstrates how even small regular contributions, combined with a reasonable interest rate and a long investment horizon, can accumulate substantial wealth. The earlier you start investing and the more frequently your interest compounds, the greater the impact of compound interest on your financial future.

Use this tool to experiment with different scenarios and visualize the potential growth of your investments over time.

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