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 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: The more frequently interest is compounded, the greater the return due to the exponential growth effect.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for retirement planning, savings strategies, and debt management. Small differences in rates or compounding frequency can lead to large differences over time.

4. Using the Calculator

Tips: Enter the principal amount, annual interest rate (as percentage), time period in years, and select compounding frequency. All values must be positive numbers.

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 and pay interest monthly, but check with your specific bank.

Q3: Why does compounding frequency matter?
A: More frequent compounding means interest is calculated more often, leading to slightly higher returns.

Q4: Is this calculator accurate for real savings accounts?
A: It provides estimates. Actual returns may vary due to changing rates, fees, or account terms.

Q5: How can I maximize compound interest?
A: Start early, contribute regularly, choose accounts with higher rates and more frequent compounding.