Opening a savings account is a great choice if you want to set some money aside and grow your funds, but not all savings accounts offer the same return on your investments. So, if you’re interested in rapid money growth, a savings account with compound interest may be the best option.
In this article, we’ll explain what a compound interest savings account is and how it works. We’ll also provide details on different accounts that can help you earn compound interest.
What Is a Compounding Interest Savings Account?
Compound interest savings accounts allow you to earn interest on interest. They apply interest multiple times during the year, typically on a daily, quarterly, or monthly basis. This means that every time interest is calculated, it includes the interest earned on the principal investment and any previously accumulated interest.
The interest in your account accumulates faster if your account compounds more frequently. So, if two accounts have the same interest rates but the interest rates in one account compound daily and in the other monthly, the funds in those two accounts won’t grow at the same speed.
Do All Savings Accounts Have Compound Interest?
Some savings accounts, such as traditional ones, don’t have a compound interest and are considered simple interest accounts. Unlike compound interest savings accounts, which calculate interest based on the principal balance and previously accumulated interest, simple interest accounts only pay interest on the principal investment.
For example, if you invest $1,000 in a simple interest account with an annual interest rate of 1%, you’ll earn $10 every year. Meanwhile, a compound interest savings account with the same interest percentage will also earn you this amount, but the interest rate will be applied to the full $1,010 next year to earn you $10.10 instead.
Here’s an example of how the interest amount you’ll earn grows over the years:
- Year one—$1,000 + 0.01 x $1,000 = $1,010
- Year two—$1,010 + 0.01 x $1,010 = $1,020.1
- Year three—$1,020.1 + 0.01 x $1,020.1 = $1,030.301
What Is the Best Compound Interest Savings Account?
The best compound interest savings account depends on your needs, goals, and financial standing. There are various options you can choose from, but the most popular ones include:
- High-yield savings accounts
- Certificates of deposit
- Money market accounts
- Bonds
- Mutual funds
- Real estate investment trusts
High-Yield Savings Accounts
A high-yield savings account (HYSA) lets you earn a more competitive annual percentage yield (APY) than traditional savings accounts. While there’s no definitive answer as to the amount of interest that qualifies as high-yield, anything above 0.46% is typically considered high.
High-yield savings accounts are a safe investment option since they’re FDIC-insured up to $250,000 per depositor. The best place to look for these accounts is online banks because they have lower overhead costs, meaning they’ll likely have lower minimum deposit requirements than brick-and-mortar banks.
Certificates of Deposit
Certificates of deposit (CDs) are one of the safest choices to grow your funds, and they’re a great option if you can afford not to withdraw the money you invest for a certain period. When investing in CDs, you must leave the money in the account for a certain period—ranging from a week to ten years—during which you earn interest on your deposit.
Most CDs let you earn compound interest, and when the CD matures, you can either withdraw the funds or roll the initial deposit and the interest you earned into a new CD. The only catch is that you can’t make withdrawals until the CD matures—otherwise, you’ll face penalties.
Money Market Accounts
If you want to enjoy the benefits of both compound interest savings accounts and checking accounts, you can consider money market accounts (MMAs). This type of account allows you to earn a higher interest than regular savings accounts, and it’s a savings account with daily compound interest. On top of this, MMAs may also include checking account features like:
- Paper checks
- Debit cards
- ATM cards
Bonds
When buying bonds, you’re essentially lending money to the bond issuer. In return, they agree to pay you interest during the bond’s life and repay you the initial deposit amount at the end of the term.
Bonds are similar to CDs, but they have longer maturity terms—sometimes as long as 30 years. They also come with varying degrees of risk, but they’re generally riskier than CDs since they’re not FDIC-insured.
To reap the benefits of compound interest when investing in bonds, it’s best to reinvest the interest you earn.
Mutual Funds
Mutual funds are investments that help you earn compound interest rather than savings accounts. When you invest in mutual funds, you buy a pool of diverse securities like stocks, ETFs, and other assets. If one investment performs poorly, you may still earn a profit on the others.
The amount of compound interest you can earn through mutual funds depends on the fund itself. Some funds are designed for moderate money growth, while others are geared toward higher growth and provide large returns, but they’re also riskier.
Real Estate Investment Trusts
A real estate investment trust (REIT) is a legal entity that owns real estate and lets you invest in it without outright purchasing property. Instead, you buy shares from a REIT and get 90% of their taxable income in the form of dividends. You can invest in various types of real estate, such as hotels, resorts, or storage facilities, and if you reinvest the dividends you receive, you can earn compound interest.
The Best Alternative to Compound Interest Savings Accounts
While all the accounts above will help you grow your funds faster, none of them offer another important perk—robust security features needed to protect you against financial scams that are extremely common today.
This is why a high-security savings account is a great alternative to traditional savings accounts with compounding interest—it’s designed to help you save funds and rest assured that your savings can never be compromised.
The only such account that lets you save without fear of fraud is FortKnox by Austin Capital Bank. This is the first savings account that allows you to earn interest on your money while ensuring fund protection with a long list of top-notch security features.
