❓ Frequently Asked Questions – Interest Calculator
What is the difference between simple and compound interest?
Simple interest is calculated only on the original principal amount throughout the investment period. Formula: I = P × R × T. Compound interest is calculated on both the principal and the accumulated interest from previous periods — so you earn "interest on interest." Over time, compound interest grows significantly faster than simple interest, especially at higher rates and longer periods.
What does compounding frequency mean?
Compounding frequency is how often interest is calculated and added to your balance in a year. Options include annually (once/year), semi-annually (twice/year), quarterly (4 times/year), monthly (12 times/year), weekly (52 times/year), and daily (365 times/year). More frequent compounding results in slightly higher returns because interest is reinvested more often.
What is continuous compounding?
Continuous compounding is the theoretical maximum limit of compounding frequency, where interest is calculated and added at every instant. The formula is A = P × e^(R×T), where e is Euler's number (≈2.71828). While not used in practice for savings accounts, it's used in financial mathematics and derivatives pricing. It produces slightly more interest than daily compounding.
What is the Effective Annual Rate (EAR)?
The Effective Annual Rate (also called Annual Equivalent Rate) shows the true yearly interest rate after accounting for compounding within the year. For example, a 12% nominal rate compounded monthly has an EAR of about 12.68%, because interest is being added monthly and each month's interest earns more interest. EAR lets you accurately compare accounts with different compounding frequencies.
What is the Rule of 72?
The Rule of 72 is a quick mental formula to estimate how many years it takes for an investment to double at a given interest rate. Simply divide 72 by the annual interest rate. For example, at 8% interest rate, your money doubles in approximately 72 ÷ 8 = 9 years. It works best for rates between 6% and 10% and gives a good approximation for compound interest.
How does the monthly contribution feature work?
In the Compound Interest mode, you can enter an additional monthly contribution (like a regular savings deposit). The calculator adds this contribution at the end of each month and compounds the entire balance. This helps you see how regular monthly savings dramatically accelerate growth over time, beyond just leaving the initial principal to grow.