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 savings accounts grow faster than standard accounts over time.

2. How the Calculator Works

The calculator uses the compound interest formula:

Where:

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

Explanation: More frequent compounding (higher n) results in higher returns. The 2021 high-yield savings rates (typically around 0.50% APY) are used as default.

3. Understanding High-Yield Savings

Details: High-yield savings accounts offer significantly higher interest rates than traditional savings accounts, typically from online banks with lower overhead costs.

4. Using the Calculator

Tips: Enter your initial deposit, expected interest rate (0.50% is typical for 2021), time horizon, and compounding frequency to see your potential earnings.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between APY and APR?
A: APY (Annual Percentage Yield) includes compound interest, while APR (Annual Percentage Rate) does not. APY gives a more accurate picture of earnings.

Q2: Are high-yield savings accounts safe?
A: Yes, when offered by FDIC-insured banks (up to $250,000 per depositor).

Q3: Why are rates lower in 2021 than previous years?
A: Savings rates generally follow Federal Reserve interest rates, which were lowered in response to economic conditions.

Q4: How often do online banks compound interest?
A: Most compound daily and pay monthly, but check with your specific bank.

Q5: Are there limits on withdrawals?
A: Federal Regulation D limits certain withdrawals to 6 per month, though this was suspended during the pandemic.