The compound interest calculator is used to estimate how much money can grow over time using the power of compounding.
The compound interest is the interest you earn on both the money you initially invested in and the interest that has been added to it. So, it helps your money grow faster over time.
Let's understand it with an example.
A = P( 1 + 

)^{nt} 
Where,
A = Final amount (principal + interest earned)
P = Principal amount (present value)
r = Annual interest rate (in decimal)
n = Number of compounding periods per year
t = Total time (in years)
Let's take an example.
Suppose you invested $5000 at the rate of 5% annual interest compounded monthly. Find out the future value after 10 years.
Here,
P = $5000
r = 5/100 = 0.05 (in decimal)
n = 12 (compounded monthly)
t = 10
Now put all the values in the compound interest formula.
A = P( 1 + 

)^{nt} 
= 5000( 1 + 

)^{(12 × 10)} 
= 5000 × (1.0041667)^{120}
= 5000 × 1.647016
Future value (A) = $8235.
Interest Earned = $8235  $5000 = $3235.
So, after 10 years, you will earn a total interest of $3,235 and the final value will be $8,235.
Simple interest is calculated on the principal amount only. While compound interest is calculated on the previous interest plus the principal amount. Also, in simple interest, the interest for each year is the same, unlike compound interest.
It's useful in various ways:
It means at what interval of time the interest will be accrued. For example, every month, every quarter, or annually.