1. What is Compound Interest?

Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods. It causes wealth to grow faster than simple interest, especially over long periods, because you earn interest on interest.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

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

Explanation: The more frequently interest is compounded, the greater the return, as interest is calculated on an increasingly larger principal.

3. Importance of High-Yield Savings

Details: High-yield savings accounts typically offer interest rates 10-25 times higher than traditional savings accounts. Over time, this difference can result in significantly more money earned through compound interest.

4. Using the Calculator

Tips: Enter your initial deposit (principal), the annual interest rate (APY), the number of years you plan to save, and how often interest is compounded. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between APR and APY?
A: APR is the annual rate without compounding, while APY includes the effects of compounding. Always use APY for savings calculations.

Q2: How often do high-yield savings accounts compound?
A: Most compound interest daily and pay it monthly, but check with your specific bank.

Q3: Are high-yield savings accounts safe?
A: Yes, when offered by FDIC-insured banks (up to $250,000 per depositor).

Q4: How much difference does compounding frequency make?
A: Daily compounding yields slightly more than monthly, which yields more than annual compounding.

Q5: Should I choose the highest APY available?
A: Generally yes, but also consider fees, minimum balances, and access to funds when choosing an account.