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 makes deposits grow faster than simple interest.

2. How the Calculator Works

The calculator uses the compound interest formula:

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: More frequent compounding leads to higher returns as interest is calculated on increasingly larger amounts.

3. Importance of Compounding Frequency

Details: Daily compounding yields slightly more than monthly, which yields more than quarterly or annual compounding. High-yield savings accounts typically compound daily.

4. Using the Calculator

Tips: Enter principal in dollars, annual rate as percentage (e.g., 3.5 for 3.5%), select compounding frequency, and investment period in years.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between APR and APY?
A: APR doesn't account for compounding, while APY does. APY shows the actual yield you'll earn.

Q2: How often do high-yield savings accounts compound?
A: Most compound daily and credit interest monthly.

Q3: Are there limits on withdrawals?
A: Federal Regulation D limits certain withdrawals to 6 per month, though this was suspended during COVID.

Q4: How does this compare to CD or money market accounts?
A: CDs typically offer higher rates but lock up funds. Money markets may offer check-writing privileges.

Q5: Are high-yield savings accounts FDIC insured?
A: Yes, up to $250,000 per depositor per institution.