1. What is Compound Interest?

Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods. It allows savings to grow at an accelerating rate compared to simple interest.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

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

Explanation: More frequent compounding (higher n) results in greater interest accumulation over time.

3. Importance of High-Yield Savings

Details: High-yield savings accounts typically offer much higher interest rates than traditional savings accounts, making compound interest effects more significant for growing your savings.

4. Using the Calculator

Tips: Enter principal in dollars, annual rate as decimal (5% = 0.05), compounding frequency (12 for monthly), and time in years. All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: How often do high-yield accounts compound?
A: Most compound daily, but pay interest monthly. This calculator can accommodate any compounding frequency.

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

Q3: What's a good high-yield savings rate?
A: Rates vary, but typically 4-5% APY as of 2023, much higher than traditional savings accounts.

Q4: How does this differ from CD interest?
A: CDs typically have fixed terms and penalties for early withdrawal, while savings accounts are liquid.

Q5: Should I use this for retirement savings?
A: For long-term growth, investment accounts generally offer better returns, but savings accounts provide safety and liquidity.