1. What is Daily Compounding?

Daily compounding means interest is calculated and added to the principal balance every day. This leads to faster growth compared to monthly or annual compounding because you earn "interest on interest" more frequently.

2. How Does the Calculator Work?

The calculator uses the daily compounding formula:

Where:

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

Explanation: The formula accounts for interest being calculated and added to the principal balance every single day, which accelerates growth compared to less frequent compounding.

3. Importance of Daily Compounding

Details: Daily compounding maximizes returns in high-yield accounts like money market funds (e.g., Vanguard VMFXX currently offering ~4.70% APY). The more frequent the compounding, the greater the effective yield.

4. Using the Calculator

Tips: Enter principal in dollars, annual interest rate as a percentage (e.g., 4.7 for 4.7%), and time in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: How does daily compounding compare to monthly?
A: Daily compounding yields slightly more than monthly because interest is added to the principal more frequently, creating a compounding effect.

Q2: What's the difference between APR and APY?
A: APR is the simple interest rate, while APY accounts for compounding. For daily compounding: APY = (1 + APR/365)^365 - 1.

Q3: Are money market funds FDIC insured?
A: Money market funds are not FDIC insured, but government money market funds like VMFXX invest in high-quality short-term securities.

Q4: How often do rates change?
A: Money market rates fluctuate with Federal Reserve policy. Current rates (2024) are around 4-5% for top-tier funds.

Q5: Is there a minimum investment?
A: Some funds like VMFXX have a $3,000 minimum, while others may have lower or no minimums.