Higher Interest Savings Account Calculator

Compound Interest Formula:

\[ A = P \times \left(1 + \frac{r}{n}\right)^{n \times t} \]

Principal Amount (P):

Annual Interest Rate (r):

Compounds Per Year (n):

Time Period (t):

years

Future Value (A):

Total Interest Earned:

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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:

\[ A = P \times \left(1 + \frac{r}{n}\right)^{n \times t} \]

Where:

\( A \) — Future value of the 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 (in years)

Explanation: The formula accounts for periodic compounding by dividing the annual rate by compounding periods and multiplying the time by compounding periods.

3. Importance of Compound Interest

Details: Compound interest is a powerful force in wealth building. 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 percentage (e.g., 5 for 5%), number of compounding periods per year (12 for monthly), and investment period in years.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between simple and compound interest?
A: Simple interest is calculated only on the principal amount, while compound interest is calculated on principal plus accumulated interest.

Q2: How often should interest compound for maximum growth?
A: More frequent compounding (daily > monthly > yearly) yields higher returns, though the difference diminishes with very frequent compounding.

Q3: What's the Rule of 72?
A: A quick way to estimate doubling time: divide 72 by the interest rate. At 6%, money doubles in about 12 years.

Q4: Are there taxes on compound interest?
A: Yes, interest earnings are typically taxable in the year they're credited, even if not withdrawn.

Q5: Where can I find high-interest savings accounts?
A: Online banks often offer higher rates than traditional banks. Compare rates and terms before choosing.