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 savings accounts grow faster over time compared to simple interest.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

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

Explanation: The formula accounts for how often interest is compounded, which affects the total interest earned. More frequent compounding leads to higher returns.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for financial planning. Even small differences in interest rates or compounding frequency can significantly impact savings growth over time.

4. Using the Calculator

Tips: Enter principal in dollars, annual interest rate as a decimal (e.g., 0.05 for 5%), compounding periods per year (12 for monthly), and time in years. All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: How does Schwab compound interest?
A: Schwab typically compounds interest daily for savings accounts, which means n=365 in the formula.

Q2: What's the difference between APR and APY?
A: APR doesn't account for compounding, while APY does. This calculator shows the actual interest earned (APY equivalent).

Q3: How often should interest compound?
A: More frequent compounding (daily vs. monthly) yields slightly higher returns, though the difference becomes more significant over longer periods.

Q4: Are there limitations to this calculation?
A: This assumes a fixed interest rate. Actual rates may vary, and some accounts have tiered rates based on balance.

Q5: How does this apply to Schwab accounts?
A: Schwab's high-yield savings accounts use daily compounding. Check current rates as they may change.