1. What is Daily Compounded Interest?

Daily compounded interest is a method where interest is calculated and added to the principal balance every day. This results in exponential growth of your investment over time, as you earn interest on both your initial principal and the accumulated interest from previous periods.

2. How Does the Calculator Work?

The calculator uses the daily compound interest formula:

Where:

• \( A \) — Final amount including principal and interest ($)
• \( P \) — Principal investment amount ($)
• \( r \) — Annual interest rate (unitless)
• \( t \) — Time period in years

Explanation: The formula calculates how much your investment will grow when interest is compounded daily, taking into account the effect of earning interest on previously earned interest.

3. Importance of Compound Interest

Details: Compound interest is a powerful financial concept that allows investments to grow exponentially over time. Daily compounding maximizes this effect compared to less frequent compounding periods, making it particularly beneficial for long-term savings and investments.

4. Using the Calculator

Tips: Enter the principal amount in dollars, annual interest rate as a decimal (e.g., 0.05 for 5%), and time period in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between daily and annual compounding?
A: Daily compounding calculates and adds interest every day, while annual compounding does it once per year. Daily compounding yields higher returns due to more frequent compounding periods.

Q2: How do I convert percentage rates to decimal form?
A: Divide the percentage by 100. For example, 5% becomes 0.05, 3.25% becomes 0.0325.

Q3: Can I use this for monthly contributions?
A: This calculator is for single lump-sum investments. For regular contributions, you would need a different formula that accounts for periodic deposits.

Q4: How accurate is daily compounding compared to continuous compounding?
A: Daily compounding is very close to continuous compounding for practical purposes. The difference becomes negligible for most real-world applications.

Q5: What's the rule of 72 and how does it relate to compound interest?
A: The rule of 72 estimates how long it takes for an investment to double (72 divided by the interest rate). It demonstrates the power of compound interest over time.