Question 1

What's the difference between simple interest and compound interest?

Accepted Answer

Simple interest is calculated only on your original principal, so it grows by the same dollar amount every period. Compound interest is calculated on your principal plus all interest already earned, so each period's interest is added to a slightly larger balance than the last — which is why the growth curve gets steeper over time instead of staying a straight line.

Question 2

How does compounding frequency affect my returns?

Accepted Answer

The more often interest is calculated and added to your balance, the sooner that interest itself starts earning interest. Daily compounding will out-earn annual compounding at the same nominal rate, but the difference is usually smaller than people expect, since the gap comes from interest-on-interest within a single year, not from the nominal rate changing.

Question 3

Is a higher compounding frequency always better?

Accepted Answer

For a saver, yes — more frequent compounding never earns you less at the same stated rate. It matters more in the other direction: when you owe money, a lender compounding daily costs you more over time than one compounding monthly at the same stated rate.

Question 4

Does this account for inflation or taxes?

Accepted Answer

No. The result is a before-tax, before-inflation projection. It doesn't adjust for inflation, and it doesn't account for taxes on interest, which vary by account type and country.

Compound Interest Calculator: See How Your Money Grows

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