1. What is Compound Interest?

Compound interest is the addition of interest to the principal sum of a loan or deposit, where the interest that has been added also earns interest. This differs from simple interest, where interest is not compounded.

2. How the Calculator Works

The calculator uses the compound interest formula:

Where:

• \( A \) — Future value of the 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 (in years)

Explanation: The more frequently interest is compounded, the greater the return on investment.

3. Importance of Compound Interest

Details: Compound interest is a powerful concept that can significantly grow savings over time. It's particularly important for long-term investments like retirement accounts.

4. Using the Calculator

Tips: Enter the principal amount, annual interest rate (as a percentage), number of compounding periods per year, and investment time in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between APR and APY?
A: APR (Annual Percentage Rate) doesn't account for compounding, while APY (Annual Percentage Yield) does. This calculator shows APY-type results.

Q2: How often do high-yield savings accounts compound?
A: Most compound daily, but check with your financial institution as policies vary.

Q3: Does this account for additional contributions?
A: No, this calculates compound interest on a single principal amount only.

Q4: What's a good interest rate for a savings account?
A: As of 2021, high-yield savings accounts typically offer 0.5%-1.0%, though rates vary with market conditions.

Q5: How does compounding frequency affect results?
A: More frequent compounding (daily vs. monthly) yields slightly higher returns due to the compounding effect.