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, especially over long periods.

2. How the Calculator Works

The calculator uses the compound interest formula:

Where:

• \( A \) — Final amount ($)
• \( P \) — Principal investment amount ($)
• \( r \) — Annual interest rate (decimal)
• \( n \) — Number of compounding periods per year
• \( t \) — Time the money is invested for (years)

Explanation: The formula accounts for the exponential growth of money when interest is earned on both the principal and accumulated interest.

3. Importance of Compounding Frequency

Details: More frequent compounding leads to higher returns. Daily compounding yields slightly more than monthly, which yields more than quarterly, etc.

4. Using the Calculator

Tips: Enter principal amount in dollars, annual interest rate as a percentage (e.g., 3.5 for 3.5%), time in years, and select compounding frequency.

5. Frequently Asked Questions (FAQ)

Q1: How does this differ from simple interest?
A: Simple interest only earns on the principal, while compound interest earns "interest on interest" leading to exponential growth.

Q2: What's a typical APY for high-yield savings?
A: As of 2023, top high-yield savings accounts offer 4-5% APY, though rates fluctuate with the federal funds rate.

Q3: Are there taxes on interest earned?
A: Yes, interest is taxable as ordinary income in the year it's credited to your account.

Q4: How often do banks compound interest?
A: Most high-yield savings accounts compound interest daily and credit it monthly.

Q5: Is there a risk with high-yield savings?
A: These accounts are FDIC-insured up to $250,000 per depositor per bank, making them very low risk.