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 traditional savings accounts over time.

2. How the Calculator Works

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 more frequently interest is compounded, the greater the return on your savings due to the "interest on interest" effect.

3. Importance of High-Yield Savings

Details: High-yield savings accounts typically offer interest rates 10-25 times higher than traditional savings accounts, making compound interest significantly more powerful for growing your savings.

4. Using the Calculator

Tips: Enter your principal amount, annual interest rate (APY), select how often interest is compounded, and the time period. All values must be positive numbers.

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) doesn't. Always compare APY when evaluating savings accounts.

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

Q3: Are there limits on withdrawals?
A: Federal Regulation D limits certain withdrawals to 6 per month, though this was suspended during COVID-19.

Q4: How does this compare to investing?
A: Savings accounts are lower risk but typically offer lower returns than investments like stocks over the long term.

Q5: Are high-yield savings accounts safe?
A: Yes, when offered by FDIC-insured banks (up to $250,000 per depositor per institution).