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Compare savings accounts with compound interest: How it works
Increase your earnings exponentially with a compounding account.
To see the strongest returns on your savings, you need to compare more than just interest rates. How and when an account pays you interest can greatly affect your savings potential. Compound interest is a magical tool: The more frequently your balance earns interest, the more quickly your savings grows.
How does compound interest affect my savings account?
Compound interest is among the best ways to make your money work harder for you, helping you to reach your savings goals more quickly. Compounding can increase a small amount of money today into a large balance over 10, 20 or more years.
And you don’t need to be an investor to take advantage of it — anyone who can put away money can benefit from compound interest.
To get the most out of compound interest, deposit as much as you can into your account and limit any withdrawals from it, whether for bills or fun money. The more that’s in your account at the end of the month, the more interest you’ll earn.
Even if you can’t deposit extra money into your account, your balance continues to grow as your interest compounds each month.
Editor's pick: American Express® Personal Savings High Yield Savings Account
- 1.70% APY as of 12/12/19
- No monthly fee
- No minimum balance
Editor's pick: American Express® Personal Savings High Yield Savings Account
Enjoy no monthly fees and a competitive APY with this online-only savings account. Accounts offered by American Express National Bank, Member FDIC.
- Around-the-clock online and phone support
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Compare savings accounts with compound interest
What is interest?
In the context of lending, interest is the cost of borrowing money. When you take out a loan, you typically pay interest as a percentage of the principal amount at an agreed rate.
When it comes to savings accounts or investments, interest is the money you earn for allowing the bank, credit union or other financial institution access to your money. When you deposit your money into an interest-bearing account, you’re effectively lending money to the bank. Pooling together its members money is how banks and other lenders provide loans to borrowers, among other banking activities.
Many factors play into the amount of interest you ultimately receive, including:
- The interest rate
- How it’s calculated — for example, daily or monthly
- How often it’s compounded and paid
The interest rate is often expressed as an annual percentage. The higher the interest rate you’re offered, the stronger your return.
Back to topHow can I find my monthly interest rate?
Your provider should prominently advertise the monthly variable interest rate under the product description for the particular account you’re looking at. It’s how they entice you to do business with them, and not a competitor.
If you’re not sure where to start, read our comprehensive guide to interest rates to see popular high-interest savings accounts. Note that interest rate are often variable, meaning they can change according to the federal interest rate.
What are the pros and cons of compound interest?
Compound interest is an incredible benefit. But it’s only one element to consider when shopping for a savings account.
Pros
- Accessibility. Many savings accounts with compound interest allow you to withdraw or deposit whenever you need to. Meaning you can save and still easily access your money in an emergency.
- Lower balance requirements. You can often stay in your bank’s good graces with a low balance.
- Introductory rates. To compete for your business, many banks and credit unions offer higher introductory interest rates on savings accounts for a set time.
- Increased earnings. With compound interest, your earnings increase exponentially — as long as you don’t withdraw funds.
Cons
- Lower rates. Annual interest rates may not be as strong as money market accounts and CDs, which typically offer higher rates because interest isn’t compounded monthly.
- Availability of funds. For some people, open access to savings is a drawback. You can easily dip into it for daily needs, ending up losing a portion of your interest earnings.
How do I make the most of my compound interest?
To get the most out of an account with compound interest, save as early as possible and avoid unnecessary withdrawals.
- Stay on top of your monthly minimum. Some accounts require a minimum monthly balance before requiring a fee. Keep more money in your own pocket by meeting that minimum.
- Deposit what you can. Because compound interest helps your money make money, you can increase your earnings with routine deposits to your savings balance.
- Avoid fees. Many banks waive fees for linking your savings and checking, directly depositing your paycheck or signing up for autopay. Ask about ways for you to get a leg up on your savings.
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