Account High Saving Yield Calculator

Compound Interest Formula:

\[ A = P \times \left(1 + \frac{r}{n}\right)^{n \times t} \]

Principal Amount (P):

Annual Interest Rate (r):

Time Period (t):

years

Compounds Per Year (n):

Future Value (A):

Interest Earned:

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1. What is Compound Interest?

Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods. It's often called "interest on interest" and can make savings grow at a faster rate compared to simple interest.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

\[ A = P \times \left(1 + \frac{r}{n}\right)^{n \times t} \]

Where:

\( A \) — Future value of investment
\( P \) — Principal investment amount
\( r \) — Annual interest rate (decimal)
\( n \) — Number of times interest is compounded per year
\( t \) — Time the money is invested for (years)

Explanation: The more frequently interest is compounded, the greater the return on investment due to the exponential growth effect.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for financial planning. It demonstrates how investments grow over time and helps compare different savings options.

4. Using the Calculator

Tips: Enter principal amount in dollars, annual interest rate as a percentage, time period in years, and select compounding frequency. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between simple and compound interest?
A: Simple interest is calculated only on the principal amount, while compound interest is calculated on the principal plus accumulated interest.

Q2: How does compounding frequency affect returns?
A: More frequent compounding (e.g., monthly vs. annually) results in higher returns due to interest being calculated on interest more often.

Q3: What's a typical compounding frequency for savings accounts?
A: Most savings accounts compound interest daily or monthly, while CDs and bonds typically compound annually or semi-annually.

Q4: Can I use this for investments other than savings accounts?
A: Yes, this formula applies to any investment where returns are reinvested, including certain types of bonds and dividend reinvestment plans.

Q5: How does inflation affect compound interest calculations?
A: Inflation reduces the real value of future returns. For accurate planning, consider real returns (nominal return minus inflation rate).