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Yearly Compounding Formula:
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Yearly compounding refers to the process where interest earned on an investment is added to the principal at the end of each year, and this new amount earns interest in the following year. This creates exponential growth of your investment over time.
The calculator uses the yearly compounding formula:
Where:
Explanation: The formula accounts for the exponential growth of your investment through compound interest, where each year's interest is calculated on the accumulated total.
Details: Calculating future value helps investors understand how much their current investments might grow over time, allowing for better financial planning and goal setting.
Tips: Enter the principal amount in dollars, annual interest rate as a percentage (e.g., 5 for 5%), and the number of years for the investment. All values must be positive numbers.
Q1: How does compounding differ from simple interest?
A: Simple interest is calculated only on the original principal, while compound interest is calculated on the principal plus accumulated interest.
Q2: What's the "Rule of 72"?
A: A quick way to estimate how long it takes to double your money: divide 72 by your interest rate. At 6%, money doubles in about 12 years.
Q3: How often do mutual funds actually compound?
A: While this calculator assumes yearly compounding, many funds compound more frequently (monthly or daily), which would yield slightly higher returns.
Q4: Are returns guaranteed with mutual funds?
A: No, mutual fund returns vary based on market performance. This calculator shows potential growth assuming a fixed rate of return.
Q5: Should taxes be considered in these calculations?
A: Yes, for accurate projections you should consider after-tax returns, especially for taxable accounts.