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:

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

Explanation: The formula accounts for how often interest is compounded, which significantly affects total earnings. More frequent compounding leads to higher returns.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for financial planning. It demonstrates how investments grow over time and helps compare different savings options.

4. Using the Calculator

Tips: Enter principal in dollars, interest rate as a decimal (5% = 0.05), compounding frequency (12 for monthly), and time in years. 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 accounts compound?
A: Most compound daily (n=365), but check your account terms as some may compound monthly (n=12) or quarterly (n=4).

Q3: Is the interest taxable?
A: Yes, interest earned is typically taxable as income in the year it's credited to your account.

Q4: What's a good high-yield interest rate?
A: Rates vary, but typically 3-5% APY is considered good for high-yield savings accounts (as of 2023).

Q5: How can I maximize my earnings?
A: Look for accounts with higher rates and more frequent compounding, and consider reinvesting the interest.