What Is a Compound Interest Savings Account?

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A compound interest savings account is an account that pays you interest not just on your initial deposit, but also on any interest that deposit has earned.

Albert Einstein famously called compound interest “the eighth wonder of the world.” Knowing how compound interest accounts work is key to making your money work exponentially better for you over time.

How Does Compound Interest Work?

Compound interest allows you to earn interest on the amount you’ve originally deposited. This is known as your principal. You also earn interest on any earnings you’ve made over time. To put it simply, you earn interest on your interest.

Here’s how simple interest works compared to compound interest:

• You deposit $100 into an account with a 4% interest rate.
• You don’t make another deposit into the account.
• At the end of the first year, you’ll have $104 — the initial deposit of $100, plus $4, at 4% simple interest.
• At the end of the second year, you’ll have $108 — the beginning balance of $104 from the end of the first year, plus another $4 in simple interest on your initial deposit.
• No matter how large your balance grows, you’ll never earn more than $4 interest in any given year unless you deposit more money into the account.

Now, compare that to compound interest:

• You deposit $100 into an account with a 4% annual percentage yield — meaning the effective rate after compounding is 4%.
• You don’t make another deposit into the account.
• The interest is compounded monthly.
• At the end of the first year, your account balance will be $104.07 because your interest will have earned interest through monthly compounding.
• At the end of the second year, you’ll have $108.31.
• Your interest earnings will continue to increase each year, even if you never make another deposit.

It’s easy to see how savings can add up quickly when you choose an account with compound interest. It is the closest thing you will find to free money.

Good To Know

Some accounts only offer simple interest. Simple interest means you only earn money on your balance, not on the interest. So, if you have an account that offers 4% interest and you deposit $100, you’d earn just $4 each year. The only way you could increase your interest earnings would be to make another deposit into your account.

How the Frequency of Compounding Affects Your Interest Earnings

The example above used a monthly compounding period. Other common compounding periods include daily, quarterly, semi-annually and annually. Shorter compounding periods can grow your money faster.

How To Calculate Compound Interest

Here’s the formula used to calculate compound interest:

Compound Interest Formula

A = P (1 + r/n) ^(nt)

• A is the principal plus interest accrued.
• P is the principal deposited before interest.
• r is the annual interest rate in decimal form.
• n is the number of times interest is compounded each year.
• t is the number of years the principal remains in the account, in decimal form.

For example, say you’ve just opened a bank account. How much would $1,000 at 4.00% compounded monthly over two years give you?

• A = 100(1 + 0.04/12)^12×2
• A ≈ $1,083.29

That’s approximately $1,083 earned. That shows the benefit of compounded interest. You can still make money, even without adding onto your principal.

You can also use a compound interest calculator like the one available here to find out your compound interest over time.

Benefits of Opening a Compound Interest Account

Many different account types can provide you with a safe place to keep your money. But compound interest accounts have unique advantages.

Maximizing Your Earnings With Compound Interest

When all else is equal, compound interest accounts are always better than simple interest accounts. Combine compound interest with high yields, such as the ones high-yield savings accounts offer, to maximize your interest earnings.

Long-Term Benefits: How Your Savings Grow Exponentially

Compound interest accounts produce a snowball effect on your savings. The more you save, the faster your interest earnings accumulate.

Advantages Over Regular Savings Accounts

The comparison used earlier showed a low deposit amount and short time frame, so compounding resulted in just a few cents more in interest earnings than a simple interest account provided. However, if you increase the initial investment to $500 or $1,000 or more, and factor in monthly contributions over many years, the benefits of a compound interest account become even more apparent.

Types of Accounts That Offer Compound Interest

The good thing is many different account options compound interest, so you can choose the one account or combination of accounts that best meets your needs.

Savings Accounts With Compound Interest

Savings accounts are a safe place to keep and grow money. You can put this money aside for later use. Because savings accounts provide near-instant access to your money, they’re a good choice for emergency savings and funds you’ll use in the not-too-distant future.

Certificates of Deposit and Their Compounding Benefits

Unlike a savings account, which lets you withdraw money on demand, a CD locks up your money for a predetermined period of one month to five years or more. In return, you’ll typically earn higher rates from a CD than you’ll get with a savings account.

As of April 2025, 12-month CD terms have the highest average rate — 1.78%, compared to 0.41% for a savings account, according to the Federal Deposit Insurance Corp.

Retirement Accounts and Compound Interest: IRA vs. 401(k)

Individual retirement accounts and 401(k)s may compound your interest or investment returns.

An IRA is a tax-advantaged account you can open independently through a bank or investment brokerage. You can invest your contributions in any number of assets, including money market accounts, money market funds, mutual funds and individual stocks and bonds.

A money market account is similar to a compound interest savings account — you’re essentially holding that money as cash and earning compound interest on your entire account balance. Money market funds and other investment assets, on the other hand, are investment products that can appreciate, pay dividends or both. As long as you reinvest the gains, future gains are compounded.

A standard 401(k) has the same tax benefits and compounding perks as IRAs. However, a 401(k) is an employer-sponsored account that you can only get at work. While the IRS allows higher contribution limits for 401(k)s than for IRAs, investments are usually limited to select money market accounts and mutual and exchange-traded funds selected by the plan administrator.

Features To Look For in a Compound Interest Account

Certain features serve as good points of comparison when you’re selecting a compound interest account.

Comparing Interest Rates and Annual Percentage Yields

The interest rate refers to the amount of simple interest an account earns. An annual percentage yield is the rate you earn after compounding. It’s a more accurate way to compare accounts.

Account Fees and Their Impact on Your Return

Some banks charge customers monthly maintenance fees just for having accounts. These fees typically range from roughly $5 to $25, depending on the bank and the account, and they can cost you more than you stand to gain in interest.

Consider This

Consider this: A $5 monthly fee equals $60 per year. You’d need a $14,500 balance earning the average savings account interest rate of 0.42% to earn enough interest to cover that fee — with $1.03 to spare.

Other fees to consider include overdraft and overdraft protection.

Accessibility and Withdrawal Limitations

Easy access to your money is an important consideration if you’ll tap into your savings regularly. Before April 2020, federal law limited convenience withdrawals from savings accounts, including money market accounts, to six per statement period. The Federal Reserve lifted that mandate to give consumers more access to their money during the pandemic, but some banks still impose the limit and charge a fee for excess withdrawals.

Strategies To Maximize Your Compound Interest Earnings

How you select and manage your compound interest accounts can impact your earnings. Use these tips to get the most from your savings and investments.

• Select accounts with more frequent compounding: Daily compounding earns you more interest than monthly, semi-annual or annual compounding.
• Automate your contributions: Setting up your checking account or direct deposits for automatic contributions to your savings and retirement accounts helps to ensure steady growth.
• Diversify your investments: Dividing your money between different types of bank accounts and investments is a great way to offset risk while improving your gains.

Risks and Considerations When Using a Compound Interest Account

Most people are familiar with the risks of investing in stocks and bonds — if the value of your investment decreases, you lose money. However, you might not realize that even the safest compound interest accounts, such as savings accounts and CDs, also have some risk.

• Inflation risk: Inflation robs your money of purchasing power. With a 2.5% inflation rate, for example, $100 of today’s savings will only buy $97.50 worth of goods and services a year from now.
• Financial institution risks: The FDIC insures bank deposit accounts for up to $250,000 per depositor , per account category. The National Credit Union Administration provides the same protection for credit union share accounts. You’re only eligible for one or the other if your financial institution is a member, though. Otherwise, your money could evaporate if the financial institution fails.
• Fees and penalties: Account maintenance fees, overdraft fees and other fees and penalties chip away at your balance and reduce the amount of interest you earn on your money. That’s true whether your account is earning simple interest or compound interest. But they hit compound interest accounts harder by also erasing gains on your gains.

Top Banks Offering the Best Compound Interest Accounts in 2025

GOBankingRates recently named Best Banks for 2025 across many categories of banks and bank accounts. The winners’ APYs range from 0.01% to 5%. Here’s how savings accounts from a few of the top banks compare.

Truist One Savings Account

Truist’s Truist One Savings Account earns APY on all balances. It has a minimum opening deposit of $50, and a $5 monthly fee that Truist offers several ways to waive. Pairing the account with a Truist One Checking account lets you schedule auto transfers into your savings and qualify for special relationship banking perks.

U.S. Bank Smartly Savings

U.S. Bank Smartly Savings account customers earn APY on their balances and can earn up to APY with relationship banking. The account has a $25 minimum opening deposit and a waivable $5 monthly fee. Digital budgeting tools make your account easy to access and maintain.

Varo High-Yield Savings

Varo is an online bank that pays APY on up to $5,000 of savings when you receive $1,000 in direct deposits into its high-yield account. After that, the APY drops to a still-competitive APY. The account has no fees. Automatically round up purchases you make from the account to grow your savings faster.

Here’s a comparison overview of the above savings accounts.

Savings Account Options

SELECTED BANK

Truist Bank Savings Accounts

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MOST COMPARABLE

U.S. Bank Savings Account

Read Review

MOST COMPARABLE

4.7

GBR RatingGOBankingRates scores and rankings are objectively determined by our research/editorial team. Our scoring formula weighs several factors that differ from category to category depending on what consumers want from varying products and banks. Read our full Editorial Guidelines here.

Varo Bank Savings Account

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Fees

Fees

Fees

$5, waivable

No monthly service fee

None

APY

APY

APY

Up to

Up to

Min Opening

Min Opening

Min Opening

$25 to $50

$25

$0

Is a Compound Interest Account Right for You?

Compound interest supercharges your savings by paying you interest on both deposits and the interest the account has earned. Fortunately, most bank and investment accounts earn compound interest or gains, so maximizing your earnings comes down to looking at APYs, fees and other account features. Compare a few accounts, perhaps starting with GOBankingRates Best Banks of 2025, then open the best account for your needs to start building your financial future with compound interest.

Dawn Allcot contributed to the reporting for this article.

Rates are subject to change; unless otherwise noted, rates are updated periodically. All other information on accounts is accurate as of April 4, 2025.

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