There are many types of compound interest accounts, such as traditional savings, certificates of deposit, money market accounts and more. The best account type for you depends on what you’re saving for, how often it compounds, the eligibility and requirements and how strong the rate is. No matter your end goal, the right compound interest account could help you reach your financial goals sooner.
Compound interest is actually very simple: The interest earned gets added to the account’s principal, effectively making your interest earn more interest.
Compound interest has three main factors:
Most interest-bearing accounts compound daily or monthly, meaning your earned interest is folded into your balance each day or once a month. Daily compounding is the ideal rate, as it’s the fastest way to grow your money. But depending on the interest rate and your balance, the difference between daily, monthly and yearly compounding might only amount to a matter of pennies.
Here are the four most common ways interest is compounded:
Compound interest can mean big savings over time, with little to no effort.
For example: If you place $500 into a daily compounding savings account with a 5% interest rate and let it sit for one year. After one year, your total principal balance is $525.63, the next year it’s at $552.58, and the next is $580.91, and so on. In five years, your balance becomes $642. Compound interest drastically speeds up the savings process without any extra effort — that’s the power of compounding interest accounts.
When comparing the best compound interest account for you, consider the account’s requirements, its rate and how often it compounds.
Savings accounts often compound daily or monthly. These accounts tend to limit the number of withdrawals you make each month, and their interest rate fluctuates alongside changes to the federal interest rate. The best high-yield savings accounts offer far more competitive yields than traditional brick-and-mortar banks, and we often see APYs around 5%.
Customers Bank High Yield Savings through Raisin
With Customer Bank powered by Raisin, get one of the highest APYs available, plus no transaction limits and $1 minimum deposit
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CDs typically compound daily or monthly. Compared to savings accounts, their main advantage is that they’ll lock in the account’s APY for the duration of the CD term — if the fed rate changes, your CD’s APY is unaffected for the term. If you need to withdraw your money before the term is up, you’ll pay an early withdrawal fee. The best CDs offer high interest rates for a low minimum opening deposit, and average rates are anywhere from 0.22% to 1.39%, according to the FDIC.
Western Alliance Bank 12 months CDs through Raisin
Western Alliance offers a strong 4.85% APY on its 12-month CD through Raisin. Pay no fees and just a $1 minimum deposit.
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While rare, some checking accounts offer interest, which typically compounds daily, monthly, quarterly or yearly, depending on the bank. Checking accounts tend to have lower interest rates than savings accounts or CDs and may also carry fees or restrictions. For example, Axos Bank Rewards Checking offers up to 3.3% APY but only up to $50,000. Still, this is better than the FDIC interest rate average for checking accounts, which is currently at 0.08% APY.
SoFi Checking and Savings
Direct deposit offers overdraft coverage and the ability to get paid up to two days early.
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These accounts compound daily, monthly, quarterly or yearly, depending on the bank. Money market accounts are very similar to a savings account when it comes to interest and saving money. The main difference is that money market accounts typically offer a debit card and the ability to write checks. Rates between savings accounts and money market accounts are roughly similar, so the one you choose depends on whether you value the additional spending flexibility.
Quontic Bank Money Market
Quontic bank offers a high 5.00% APY with no monthly or overdraft fees.
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An IRA account is made of a variety of investment options, and each could compound at a different rate: monthly, bi-monthly or annually. There are multiple great IRA options, including Roth and Simple IRAs, each with its own set of rules and advantages. Compared to savings accounts or CDs, IRA accounts are riskier as they’re subject to the ups and downs of the stock market. These accounts have the opportunity for the biggest gains over a long period, though they carry more risk of value loss through market volatility.
SoFi IRA
SoFi Invest provides complimentary access to certified financial planners and a fee-free robo-advisor.
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Also called CMAs, these accounts are like a checking and savings hybrid. They’re FDIC insured and can offer checks and debit cards, earn APY and allow you to easily move your funds to and from your investment account. CMAs are typically offered by non-banks, such as investment firms or brokerages, where your funds are invested across different institutions. CMAs often have high balance requirements and may come with monthly fees.
Wealthfront Cash Account
Wealthfront's cash management account offers a high 5.00% APY, with no monthly fees, unlimited withdrawals and transfers.
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Dividend stocks tend to compound quarterly, though you can find some that compound monthly. Dividend stocks are a type of stock investment that pays out dividends based on your owned shares. These can lead to stable, reliable returns on an investment, though the quality of your investment can range from company to company and how they react to a fluctuating economy.
Bonds earn interest monthly and compound semi-annually every six months. Bonds are an asset investment option similar to stocks or real estate. By buying one, you’re technically giving the entity a loan. These entities eventually pay back the bond amount purchased by the consumer, plus interest. They fall into three categories: corporate, government and municipal. You can’t retrieve your money before the bond’s maturity without paying some form of penalty, typically three to 15 months of interest, depending on when you cash out. Bonds tend to have higher interest rates than savings accounts and CDs: I bonds currently sport an APY of 6.89%, according to TreasuryDirect.
These high-return investment options grant assets that return a portion of the company or land’s profits. Since its profits rely on other factors like the real estate market, REITs are a riskier investment compared to savings accounts or CDs.
Narrow down top compounding accounts by rates, fees and benefits. Select up to four accounts and select “Compare” to see how they stack up side-by-side. You can also use the calculator to estimate how much your savings can grow.
You can open a compound interest account the same way you would any bank account. The first step would be to find an account with a compounding frequency that suits your needs. Look at the deposit agreement to find the account’s compounding frequency, and if you can’t find it, contact the bank.
Get the most out of the power of compounding interest with these tips:
Compound interest is one of the most important things to consider when trying to save money.
If you’re not sure where to start, look at our top savings accounts. Note that interest rates are often variable, meaning they can change according to the federal interest rate.
Yes, most are protected compound interest accounts. As long as you bank with an FDIC- or NCUA-insured institution, your funds are protected up to $250,000. Most reputable banks and accounts are insured. Accounts that don’t offer this insurance are much riskier.
Certificates of deposit (CD) and high-yield savings are both deposit accounts that earn interest. With CDs, your funds are locked for a set term, usually between three months to 10 years. If you withdraw funds from a CD before the term is over, you’ll likely have to pay early withdrawal penalty fees, usually around 90 to 180 days of earned interest. CDs also don’t allow you to add more funds to the account after you open it. With savings accounts, you can add or withdraw funds as you wish within the transaction limits.
If you want more access to your savings, a high-yield savings account is the way to go. But if you want more bang for your buck, a CD is the better option, and they tend to offer much higher APYs than traditional savings accounts.
Unlike Treasury bonds, treasury bills (T-bills) don’t compound interest. Treasury bonds compound interest every six months. T-Bills are bought at a discounted rate, and you get the full value when it matures. For example, say you were to buy a T-Bill for $90, and it’s worth $100. Once it matures, you get $100, so you technically made $10.
Yes, they can. A 401(k) is a retirement plan offered by employers to help employees save up money for retirement. When you contribute to the 401(k), you can choose to invest the funds into investments that compound interest.
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