1. What is Compound Interest?

Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods. It allows savings to grow at an accelerating rate over time, as you earn "interest on 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)

Monthly Yield Calculation: Estimated monthly interest = \( P \times \frac{r}{12} \)

3. Importance of Compounding Frequency

Details: More frequent compounding leads to greater returns. Monthly compounding (n=12) yields better results than annual compounding (n=1) at the same rate.

4. Using the Calculator

Tips: Enter principal amount in dollars, annual interest rate as percentage (e.g., 5 for 5%), time in years, and select compounding frequency.

5. Frequently Asked Questions (FAQ)

Q1: How does compounding frequency affect returns?
A: More frequent compounding (monthly vs. annually) results in higher returns due to interest being calculated on accumulated interest more often.

Q2: Is the monthly yield estimate accurate?
A: It's an estimate based on current principal. Actual monthly yield will increase as your balance grows from compounding.

Q3: 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-equivalent results.

Q4: Are there taxes on these earnings?
A: Yes, interest earnings are typically taxable as income, unless in a tax-advantaged account like an IRA.

Q5: How can I maximize my savings growth?
A: Look for accounts with higher interest rates and more frequent compounding, and consider making regular additional contributions.