1. What is Compound Interest?

Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods. It causes wealth to grow faster than simple interest because you earn interest on interest.

2. How Does the Calculator Work?

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 higher returns. The formula shows exponential growth over time.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for long-term financial planning. Small differences in rates or compounding frequency can significantly impact final amounts over decades.

4. Using the Calculator

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

5. Frequently Asked Questions (FAQ)

Q1: How often do high-yield savings accounts compound?
A: Most compound daily, but check with your specific financial institution as policies vary.

Q2: What's the difference between APR and APY?
A: APR doesn't account for compounding, while APY does. Always compare APY when evaluating accounts.

Q3: How can I maximize compound interest?
A: Start early, reinvest dividends/interest, choose accounts with higher rates and more frequent compounding.

Q4: Is compound interest taxed?
A: Yes, interest earnings are typically taxable income in the year they're credited to your account.

Q5: Can compound interest work against me?
A: Yes, with loans/debt, compounding works in the lender's favor, increasing what you owe over time.