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

Explanation: The formula accounts for how frequently interest is compounded, which significantly affects the final amount.

3. Importance of Compounding Frequency

Details: More frequent compounding (daily vs. annually) results in higher returns. For example, $10,000 at 5% for 10 years yields $16,470.09 when compounded monthly vs. $16,288.95 when compounded annually.

4. Using the Calculator

Tips: Enter principal amount in dollars, annual interest rate as a percentage (e.g., 5 for 5%), number of compounding periods per year (12 for monthly), and investment duration in years.

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. APY will be higher than APR when interest compounds more than once per year.

Q2: How often do high-yield accounts typically compound?
A: Most compound daily or monthly, which is better than annual compounding for the saver.

Q3: Are there limits to compounding benefits?
A: While more frequent compounding increases returns, the difference between daily and continuous compounding is minimal.

Q4: How does this compare to simple interest?
A: Simple interest only earns on principal. Compound interest earns "interest on interest," leading to exponential growth.

Q5: What's the Rule of 72?
A: A quick way to estimate doubling time: 72 divided by the interest rate gives approximate years to double your money.