Understanding Compound Interest To Grow Your Savings

July 08, 2021

Understanding Compound Interest To Grow Your Savings

Having extra funds on hand has been linked to better physical and mental health, and when you're putting money aside to save for something you want or need, you may be able to help your funds grow a little more quickly by taking advantage of the power of compound interest. So, what is compound interest, and how it is work?

Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. It is the result of reinvesting interest, rather than paying it out, so interest in the next period is earned on the principal sum plus previously accumulated interest.¹

How compound interest works

Say, you decided you can put aside $10 each week, or $40 a month. If you put that money in a drawer for 5 years, you'd end up with $2,400.

>Now, let's say that instead, you put your money into a saving account and allow it to collect interest. This interest will compound daily, monthly, or annually, meaning that the interest you've already earned will also earn interest (and help keep your money growing).

The compound interest rate offered by the bank is often called the average percentage yield (APY). Let's say your bank offers a rate of 1.00% APY, compound daily. After 5 years in the bank, you'd have $2,460.98.² That's $60.98 more than if it sat in the drawer.

Want to make your money grow faster?

1. Consider saving more

Say you've found a way to cut expenses so you can put $20 aside each week, or $80 a month. After 5 years in the bank, with 1.00% APY you'd have $4,921.96.² That's $121.96 more than if it sat in the drawer.

2. Look for a bank that pays a higher rate

Consider comparing APYs at different banks. Try searching online for high-yield savings accounts and ask your family and friends about their experiences.

Say you're able to find a bank that offers 2.00% APY. After 5 years of putting $80 a month in the bank, you'd have $5,048.06.² That's $248.06 more than if it sat in a drawer.

Okay, now we understand Compound interest, but still prefer the old-way method, here are some piggy bank recommendations that you might like. Piggybank is a good way to teach our child to learn to save from early age, it's a good choice for gifts too.