Compound Interest Savings Accounts Explained

Written by Banks Editorial Team
4 min. read
Written by Banks Editorial Team
4 min. read

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Savings accounts are a popular resource for building wealth. These bank accounts are federally insured and accumulate risk-free interest. You won’t have to worry about losing money due to a poor investment. While many people use savings accounts for safe interest accrual, consumers can select from several accounts. Some consumers gravitate towards a compound interest savings account.

Financial institutions offer these accounts, but you can typically get better interest rates with fintech companies like Current (*) . In addition, since Current has no physical branches and lower overhead, they can pass more of their savings to consumers. Regardless of which financial institution you use to store your cash, compound interest savings accounts have several perks over traditional savings accounts.

Earn 4.00% APY on your Savings

Mobile banking done better. No overdraft fees/hidden fees. Get paid up to two days faster with direct deposit. Earn up to 15x the points on swipes.

What is Compound Interest and How Does It Work?

Compound interest is interest that accumulates at set intervals. For example, you can find a compound interest savings account that pays interest daily, weekly, monthly, or at another frequency. The interest you receive will increase your total balance and impact how much you receive at the next interval.

Let’s assume you have $1,000 in your savings account at 4% APY. Most people believe they would receive $40 as an interest payment since 4% of $1,000 is $40. However, you can end up with more than $1,040 if you have a compounded savings account with monthly intervals. You will receive $3.33 after the first month ($40 / 12 = $3.33). This payment will raise your balance to $1,003.33. Instead of receiving 4% APY on $1,000, you now receive that same interest on $1,003.33. The next interest payment will be $3.34, raising your total to $1,006.67. The following payment will be $3.36. You make a few extra cents because of the intervals.

In our example, we assumed a 4% interest rate for your savings account. While this may sound too good to be true at traditional financial institutions, you can get a 4.00% APY right now with a Current Savings Pod. Current is a mobile banking app with less overhead than a conventional bank. Current can pass these savings onto their customers via a 4.00% APY rate on your savings. (1)

Simple vs. Compound Interest

Simple and compound interest both increase your wealth, but at different intervals. Simple interest is an annual calculation. For example, if you have $5,000 in the bank and earn 1% interest, your account balance will be $5,050 at the end of the year.

A compound interest savings account with a 1% interest rate grows differently. If it has weekly intervals, the weekly interest payments will contribute to future interest. You will end up with more than $5,050 at the end of the year because of compounding interest.

Compound Interest Example

We will use an example of a 2% APY on a compound interest savings account with $10,000, half of the APY you can get with Current. The bank pays in monthly intervals throughout the year. A simple interest savings account will have a $10,100 balance in six months. You can get a higher balance with a compounded interest savings account that has the same APY over six months.

  • Month 1: $10,016.67
  • Month 2: $10,033.36
  • Month 3: $10,050.08
  • Month 4: $10,066.83
  • Month 5: $10,083.61
  • Month 6: $10,100.42

You end up with an extra $0.42 after six months. While this amount of money will not change your life, free proceeds will continue compounding as you build up your savings. You can increase your payouts with a higher balance and by finding a savings account with a higher compounding interest rate.

Earn 4.00% APY on your Savings

Mobile banking done better. No overdraft fees/hidden fees. Get paid up to two days faster with direct deposit. Earn up to 15x the points on swipes.

How Does Compound Interest Affect Your Savings?

Compound interest allows your savings to grow faster than a traditional savings account. If you put $1,000 into a savings account with annual compounding at a 4% rate, your savings account will grow to $1,480.24 in 10 years. Switching to a compound interest savings account with daily compounding turns $1,000 into $1,491.79 in 10 years. 

It’s extra money without any additional work. A compound interest savings account works harder than a simple interest savings account. You work hard to earn money, and the more it works for you, the more opportunities you will have later in life. You can have a smoother retirement by focusing on every optimization and utilizing your money smartly.

Other Factors That Affect How Much You Earn from Your Savings

The type of savings account you select plays a role in how much interest you earn. Knowing the other factors can maximize your earnings and enable you to hit your financial objectives sooner. These elements impact how much interest you receive at each interval.

The Balance in Your Account

Your account’s balance is a decisive factor that determines how much interest you earn. You have more control over this factor than any other. Bank account holders can raise their interest payments by contributing more money to their savings accounts each month.

You can increase your monthly contribution by increasing your income or lowering your expenses. Cutting costs is the more straightforward approach when getting started. You can review spending insights from Current to discover opportunities to eliminate expenses and keep more of your earnings. While cost-cutting provides immediate benefits, you can only lower expenses so much. Growing your income with a higher-paying job, side hustle, and other strategies is the long-term path to a high balance in your savings account.

Your Interest Rate

Banks set interest rates on their savings accounts. These rates determine how much you get paid, and most banks prefer to keep their money close. Most savings accounts have an interest rate well below 0.5%. Finding a bank with a rate double your bank’s rate has the same change as doubling your balance in your existing account. Current has a 4% APY on their daily compounding savings accounts, allowing you to make more money with a lower balance.

Account Fees

Account fees don’t affect how much interest you receive, but they will lower your return on investment. High account fees can minimize your profit. If you receive $30 in interest payments and pay a $5 fee to maintain the account, you only end up with $25. While any profit is better than no profit, you must consider account fees when calculating your return. Some banks waive fees under certain conditions, and some financial institutions have higher fees than others. Reviewing several banking options will help you find compound interest savings accounts with high-interest rates and minimal fees.

Maximize Your Compound Interest Savings with a High-yield Savings Account

Compound interest savings allow you to accumulate money without taking any risk. You can make more money with stocks, crypto, and other assets, but you can also lose a lot of money during a downturn. Savings accounts are easily accessible and offer risk-free money.

Putting your money into a high-yield savings account amplifies the benefits of a savings account. You make more money without having more funds in your bank account. Current (*) makes it easy to create multiple accounts and collect a high yield. Creating multiple accounts lets you sort your money based on financial goals. You can create savings pods for an upcoming vacation, emergency funds, down payment, and other expenses. You can open an account on Current by visiting their website or downloading the Current mobile banking app.

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Current is a financial technology company, not a bank. Banking services provided by and Visa® Debit Card issued by Choice Financial Group, Member FDIC, pursuant to a license from Visa U.S.A. Inc and can be used everywhere Visa debit cards are accepted.

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The Annual Percentage Yield ("APY") for Current Interest is variable and may change at any time. The disclosed APY is effective as of January 1, 2022. No minimum balance is required. Must have $0.01 in savings pods to earn Current Interest on up to $2000 in deposits per Savings Pod up to $6000 total.  Please refer to Current Interest Terms and Conditions.

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Current is a financial technology company, not a bank. Banking services provided by and Visa® Debit Card issued by Choice Financial Group, Member FDIC, pursuant to a license from Visa U.S.A. Inc and can be used everywhere Visa debit cards are accepted.

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