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 significantly boost savings growth over time compared to 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 (higher n) leads to greater returns. The formula shows how money grows exponentially over time with compound interest.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for financial planning. Even small differences in interest rates or compounding frequency can lead to significant differences in returns over long periods.

4. Using the Calculator

Tips: Enter principal amount in dollars, annual interest rate as a 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 is the annual rate without compounding, while APY includes compounding effects. This calculator shows APY-like results.

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

Q3: Are there limits on high-yield savings accounts?
A: Some have minimum balances or transaction limits. Interest rates may change over time.

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

Q5: Is compound interest taxable?
A: Yes, interest earned is generally taxable as income in the year it's credited to your account.