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 what makes high-yield savings accounts grow faster over time compared to simple interest accounts.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( A \) — Final amount ($)
• \( P \) — Principal amount ($)
• \( r \) — Annual interest rate (decimal)
• \( n \) — Number of compounding periods per year
• \( t \) — Time in 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

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

4. Using the Calculator

Tips: Enter the principal amount in dollars, annual interest rate as a percentage (e.g., 2.5 for 2.5%), number of compounding periods per year (12 for monthly), and time in years.

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. This calculator shows APY results.

Q2: How often do high-yield savings accounts compound?
A: Most compound daily, but check with your bank. Daily compounding (n=365) gives the best returns.

Q3: Are there limits on high-yield savings accounts?
A: Some have minimum balance requirements or limit withdrawals. Interest rates may change over time.

Q4: How does this compare to CDs or money market accounts?
A: CDs typically offer higher rates but lock your money for a term. Money markets may offer check-writing privileges.

Q5: Is the interest taxable?
A: Yes, interest earned is generally taxable as income in the year it's credited to your account.