How Interest Works on Savings Account
- AHWCCUL
- Mar 4
- 2 min read
Updated: Apr 23
Interest on savings account is the money a bank or financial institution pays you for keeping your money with them. With compound interest, the interest earned is added to your balance, and future interest is calculated on the increased balance.
Compound interest is applied to both your initial deposit and the interest accumulated over time, allowing your savings to grow faster as earnings are reinvested.
How Interest Works on Savings Account
Important Highlight
Banks state their savings interest rates as an annual percentage yield (APY), which includes compounding.
Compound interest is interest calculated on principal and earned interest from previous periods.
Simple interest is only calculated based on principal.
Interest compounded over a long enough time period can help your savings grow faster.
The Power of Compounding Interest
In savings accounts, interest can be compounded at different intervals such as daily, monthly, or quarterly. The more frequently interest is added to your balance, the faster your savings will grow.
For instance, with a ₵1,000 deposit and daily compounding, the interest increases by 1/365th of 1% each day. After one year, the balance would grow to ₵1,010.05, compared to ₵1,010 with simple interest.
While ₵0.05 might not seem significant, over 10 years, the same ₵1,000 would grow to ₵1,105.17 with compound interest, adding over 10% to the original investment.
Though this might still appear modest, consider saving ₵100 per month and adding it to your initial ₵1,000 deposit. After one year, you would have earned ₵16.05 in interest, bringing your balance to ₵2,216.05. After 10 years of contributing just $100 each month, you’d have accumulated ₵725.50 in interest, totaling ₵13,725.50.
How Savings Account Interest Builds Wealth
Compound interest can build wealth over time, even when interest rates are at rock bottom. Consider opening an Account with us to get higher APY rates