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 make savings grow at a faster rate compared to simple interest.

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 times interest is compounded per year
• \( t \) — Time the money is invested for (in years)

Explanation: The more frequently interest is compounded, the greater the return on your savings.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for financial planning. It demonstrates how investments grow over time and highlights the value of starting to save early.

4. Using the Calculator

Tips: Enter the principal amount, annual interest rate (as a percentage), time in years, and select how often interest is compounded. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between simple and compound interest?
A: Simple interest is calculated only on the principal amount, while compound interest is calculated on the principal plus accumulated interest.

Q2: How does compounding frequency affect returns?
A: More frequent compounding results in higher returns. Daily compounding yields more than monthly, which yields more than annual compounding.

Q3: What's a typical interest rate for high-yield savings?
A: Rates vary but typically range from 3% to 5% APY (as of 2023) for high-yield savings accounts.

Q4: Are there limitations to this calculation?
A: This assumes a fixed interest rate. In reality, rates may change over time. Also doesn't account for taxes or fees.

Q5: How can I maximize compound interest?
A: Start early, contribute regularly, choose accounts with higher interest rates and more frequent compounding.