1. What is Compound Interest?

Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods. It differs from simple interest in that interest is earned on interest, leading to exponential growth over time.

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 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 effect of compounding.

3. Importance of Compounding Frequency

Details: The frequency of compounding significantly affects the final amount. Daily compounding yields more than monthly, which yields more than annual compounding, all else being equal.

4. Using the Calculator

Tips: Enter the principal amount, annual interest rate (as a percentage), time period in years, and select how often interest is compounded. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between APR and APY?
A: APR (Annual Percentage Rate) doesn't account for compounding, while APY (Annual Percentage Yield) does. APY gives a more accurate picture of actual earnings.

Q2: How often do high-yield savings accounts compound?
A: Most high-yield savings accounts compound interest daily and credit it monthly.

Q3: Are there limits on withdrawals?
A: Federal Regulation D limits certain withdrawals to 6 per month, though this was suspended during COVID-19.

Q4: How safe are high-yield savings accounts?
A: They're very safe when offered by FDIC-insured banks (up to $250,000 per depositor).

Q5: Can interest rates change?
A: Yes, unlike CDs, rates on high-yield savings accounts can change based on market conditions.