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 allows savings to grow at an accelerating rate over time, as interest is earned on both the original investment and the interest that has been added to it.

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 an investment will grow over time when interest is compounded at regular intervals.

3. Importance of Savings Rate Comparison

Details: Comparing savings rates is crucial for maximizing returns on investments. Even small differences in interest rates can significantly impact long-term growth due to the power of compounding. In 2021, savings rates were historically low, averaging around 0.5%, making it essential to find the best available rates.

4. Using the Calculator

Tips: Enter your principal amount, annual interest rate (use current rates for accurate calculations), select compounding frequency, and investment period. The calculator will show the future value and total interest earned.

5. Frequently Asked Questions (FAQ)

Q1: Why were savings rates so low in 2021?
A: In response to economic conditions during the COVID-19 pandemic, central banks worldwide maintained low interest rates to stimulate economic recovery, resulting in historically low savings rates.

Q2: How often should interest be compounded for maximum growth?
A: More frequent compounding (daily or monthly) results in slightly higher returns than annual compounding, though the difference may be minimal at lower interest rates.

Q3: Are there alternatives to traditional savings accounts with better returns?
A: Yes, alternatives like certificates of deposit (CDs), money market accounts, or high-yield savings accounts often offer better rates than standard savings accounts.

Q4: How does inflation affect savings?
A: When savings rates are lower than inflation, the purchasing power of your money decreases over time, effectively resulting in a negative real return.

Q5: Should I consider other investment options besides savings accounts?
A: For long-term goals, consider diversifying with investments that typically offer higher returns, such as stocks or bonds, though these come with higher risk.