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 checking accounts grow faster over time compared to simple interest accounts.

2. How the Calculator Works

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 (daily, monthly, quarterly, etc.), which significantly affects total interest earned.

3. Importance of Compounding

Details: More frequent compounding leads to higher returns. For example, monthly compounding (n=12) yields more than annual compounding (n=1) at the same rate. This calculator helps compare different high-yield checking account options.

4. Using the Calculator

Tips: Enter principal in dollars, annual rate as 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 APY and APR?
A: APY (Annual Percentage Yield) includes compounding effects, while APR (Annual Percentage Rate) doesn't. Always compare APY when evaluating accounts.

Q2: How often do high-yield accounts compound?
A: Most compound daily (n=365), but check your specific account terms as this affects earnings.

Q3: Are there limits on high-yield checking accounts?
A: Some have balance caps or require certain activities (like debit card usage) to earn the high yield.

Q4: How does this compare to savings accounts?
A: High-yield checking often offers similar rates to savings but with more accessibility (though sometimes with more requirements).

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