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 often called "interest on interest" and can significantly boost savings 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 formula accounts for how frequently interest is added to your principal, with more frequent compounding leading to greater returns.

3. Importance of Compounding Frequency

Details: The more frequently interest is compounded, the greater your returns will be. Daily compounding yields slightly more than monthly, which yields more than quarterly, and so on.

4. Using the Calculator

Tips: Enter your initial investment amount, expected annual interest rate (APY), time horizon in years, and 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 is the simple interest rate, while APY includes compounding effects. Always use APY for savings calculations.

Q2: How does compounding frequency affect returns?
A: More frequent compounding means your interest earns interest sooner, leading to slightly higher overall returns.

Q3: Are high-yield savings accounts worth it?
A: For emergency funds or short-term savings, they offer better returns than traditional savings accounts with similar liquidity.

Q4: How often do high-yield accounts compound?
A: Most compound interest daily and pay it monthly, but check with your specific financial institution.

Q5: Are there limits to deposits or withdrawals?
A: Some accounts may have minimum balances or limit withdrawals, though federal regulations have been relaxed.