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 money grow at a faster rate than simple 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: The formula shows how your money grows when earnings are reinvested to earn additional returns over time.

3. Importance of Compounding Frequency

Details: The more frequently interest is compounded, the greater the return. Daily compounding yields slightly more than monthly, which yields more than annual compounding.

4. Using the Calculator

Tips: Enter principal amount in dollars, annual interest rate as percentage, time 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: Is compound interest taxable?
A: Yes, interest earned is typically taxable as income in the year it's credited to your account.

Q4: What's the Rule of 72?
A: A quick way to estimate doubling time: 72 divided by the interest rate gives approximate years to double your money.

Q5: Can I use this for other investments?
A: While designed for savings, the formula works for any fixed-rate investment with regular compounding.