1. What is Compound Interest?

Compound interest is the interest calculated on the initial principal and also on the accumulated interest of previous periods. It's often referred to as "interest on interest" and can help savings grow at a faster rate compared to simple interest.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

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

Explanation: The formula calculates how much your investment will grow over time with compound interest, taking into account how frequently interest is compounded.

3. Importance of Compound Interest

Details: Compound interest is a powerful concept in finance that allows investments to grow exponentially over time. The more frequently interest is compounded, the faster your money grows. This is why starting to save early and allowing your money to compound over long periods can significantly increase your wealth.

4. Using the Calculator

Tips: Enter the principal amount in dollars, annual interest rate as a percentage (e.g., 3.5 for 3.5%), select how often interest is compounded, and the time period in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between simple and compound interest?
A: Simple interest is calculated only on the principal amount, while compound interest is calculated on the principal plus any accumulated interest.

Q2: How does compounding frequency affect returns?
A: The more frequently interest is compounded, the higher your returns will be. Daily compounding yields slightly more than monthly, which yields more than quarterly, etc.

Q3: Are savings account rates fixed or variable?
A: Most savings account rates are variable and can change based on market conditions and Federal Reserve policies.

Q4: What is APY and how does it relate to compound interest?
A: APY (Annual Percentage Yield) represents the actual rate of return taking into account the effect of compound interest, making it easier to compare different savings products.

Q5: Are there limits on savings account withdrawals?
A: Federal Regulation D typically limits certain types of withdrawals and transfers from savings accounts to six per month, though this was suspended during the COVID-19 pandemic.