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 significantly boost savings growth over time.

2. How the Calculator Works

The calculator uses the compound interest formula:

Where:

• \( A \) — Final amount ($)
• \( P \) — 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 formula accounts for how often interest is compounded, with more frequent compounding leading to greater returns.

3. Importance of Compounding Frequency

Details: The more frequently interest is compounded, the greater the total return. Daily compounding provides slightly better returns than monthly, which is better than annual compounding.

4. Using the Calculator

Tips: Enter your initial deposit, expected annual interest rate (APY), investment period in years, 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 simple interest rate, while APY includes compounding effects. Always use APY for savings calculations.

Q2: How much will I earn with $10,000 at 3% APY for 5 years?
A: With monthly compounding, you'd earn about $1,616 in interest, growing to $11,616 total.

Q3: Does compounding frequency make a big difference?
A: The difference grows with larger amounts and longer terms. For example, on $100k at 4% for 10 years, daily compounding earns about $600 more than annual compounding.

Q4: Are high-yield savings accounts safe?
A: Yes, when offered by FDIC-insured banks (up to $250,000 per depositor).

Q5: How often do banks compound interest?
A: Most online banks compound daily and pay monthly, while traditional banks often compound monthly or quarterly.