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Compound interest and your savings account

With compound interest, the interest you earn on your savings is added to your account, and you then earn interest on the interest itself. It's the secret to growing your savings faster.

What is compound interest?

Compound interest means you earn interest on your initial savings balance and any interest you've already accumulated. This is different to simple interest, where your interest is only calculated on the initial balance.

For example, if you earned $20 in interest in a year and you had $800 in your account, then once that interest is paid you'd have $820. Then you'd earn interest on $820 instead of just $20.

Compound interest savings accounts

One of the main ways to earn compound interest is with a savings account. These accounts usually calculate your interest daily and pay interest monthly, so the following month you can earn interest on the interest you've just earned. This is why they're such a popular option for growing your money.

Here are some savings accounts that pay compound interest.

1 - 14 of 183
Name Maximum Variable Rate p.a. Standard Variable Rate p.a. Intro Period Government Guarantee Monthly Max Rate Conditions
Bank of Queensland Future Saver Account - 14 to 35 years
Finder Award
Maximum Variable Rate p.a.
5.50%
Standard Variable Rate p.a.
0.05%
Intro Period
Ongoing
Government Guarantee
Monthly Max Rate Conditions
  • Deposit $1,000
  • 5 eligible transactions
Go to siteView details
Macquarie Savings Account
Maximum Variable Rate p.a.
5.35%
Standard Variable Rate p.a.
4.75%
Intro Period
4 months
Government Guarantee
Monthly Max Rate Conditions
  • N/A
Go to siteView details
ING Savings Maximiser
Finder Award
Maximum Variable Rate p.a.
5.50%
Standard Variable Rate p.a.
0.55%
Intro Period
Ongoing
Government Guarantee
Monthly Max Rate Conditions
  • Deposit $1,000
  • 5 transactions
  • Grow your balance
Go to siteView details
Bendigo Bank Reward Saver
Maximum Variable Rate p.a.
5.25%
Standard Variable Rate p.a.
0.30%
Intro Period
Ongoing
Government Guarantee
Monthly Max Rate Conditions
  • Grow your balance
  • Requires Bendigo transaction account
Go to siteView details
Australian Unity Freedom Saver ($50,000 - $250,000)
Maximum Variable Rate p.a.
5.10%
Standard Variable Rate p.a.
5.10%
Intro Period
Ongoing
Government Guarantee
Monthly Max Rate Conditions
  • N/A
Go to siteView details
Newcastle Permanent Online Savings Account
Maximum Variable Rate p.a.
5.00%
Standard Variable Rate p.a.
1.00%
Intro Period
3 months
Government Guarantee
Monthly Max Rate Conditions
  • N/A
Go to siteView details
Bank of Queensland Simple Saver Account
Maximum Variable Rate p.a.
4.85%
Standard Variable Rate p.a.
4.85%
Intro Period
Ongoing
Government Guarantee
Monthly Max Rate Conditions
  • N/A
Go to siteView details
Ubank High Interest Save Account
Maximum Variable Rate p.a.
5.10%
Standard Variable Rate p.a.
0.10%
Intro Period
Ongoing
Government Guarantee
Monthly Max Rate Conditions
  • Deposit $200
Go to siteView details
St.George Maxi Saver
Maximum Variable Rate p.a.
5.35%
Standard Variable Rate p.a.
1.10%
Intro Period
3 months
Government Guarantee
Monthly Max Rate Conditions
  • N/A
Go to siteView details
Max Variable Rate includes 0.35% p.a. for 3 months for new customers who apply online
ING Savings Accelerator ($150,000 - $500,000)
Maximum Variable Rate p.a.
5.20%
Standard Variable Rate p.a.
4.70%
Intro Period
4 months
Government Guarantee
Monthly Max Rate Conditions
  • Welcome rate applies up to $500K
Go to siteView details
AMP Saver Account
Maximum Variable Rate p.a.
5.40%
Standard Variable Rate p.a.
1.20%
Intro Period
Ongoing
Government Guarantee
Monthly Max Rate Conditions
  • Deposit $1000 in previous month
Go to siteView details
First Option Bank Savings+Bonus Account
Maximum Variable Rate p.a.
5.00%
Standard Variable Rate p.a.
2.00%
Intro Period
Ongoing
Government Guarantee
Monthly Max Rate Conditions
  • Deposit $100
  • No withdrawals
Go to siteView details
IMB Reward Saver Account
Maximum Variable Rate p.a.
5.25%
Standard Variable Rate p.a.
0.00%
Intro Period
4 months
Government Guarantee
Monthly Max Rate Conditions
  • Deposit $50
  • No withdrawals
Go to siteView details
MyState Bank Bonus Saver Account
Maximum Variable Rate p.a.
5.00%
Standard Variable Rate p.a.
0.05%
Intro Period
Ongoing
Government Guarantee
Monthly Max Rate Conditions
  • Deposit $20
  • 5 debit card purchases
Go to siteView details
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How does compound interest work?

The best way to explain how compound interest works is with an example.

  • Let's say you invest $1,000 in an account with an interest rate of 5% p.a. compounded for 5 years.
  • The initial investment of $1,000 earns $50 in the first year, giving you a total of $1,050.
  • The following year, you still earn the same rate of 5% p.a. – but this time it's applied to $1,050, not $1,000.
  • This will make your balance $1,102.50 after the second year, even though you haven't deposited any extra money into the account yourself.
  • This amount ($1,102.50) is the base for compounding for the third year, and so on. After 5 years, you'll have $1,283.
  • If your money was in an account earning simple interest, you would earn returns based on the initial $1,000 only (an amount of $50 per year, every year). After 5 years, you'd have $1,250.

The longer your timeline ahead of you, the more your balance grows. In our fictional example, after 10 years, you'd have $1,647. After 20 years, $2,713. And after 50 years, $12,119 – without ever adding an extra cent of your own money.

To get the most benefit out of compound interest, deposit as much as you can into your account and restrict the number of withdrawals you make. The more money that is in your account at the end of the month, the more interest you will earn.

Use our calculator to see how you can benefit from compound interest

Initial deposit
$
Monthly contribution
$
Interest rate p.a.
%
Number of years
Total savings
Total monthly contributions
Interest earned
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Compounding is like a magic trick that makes your money grow faster, or your debt grow bigger. Either way, it means that small, consistent efforts – even as little as paying $20 extra into your mortgage, super or savings each week – can make a big impact down the track.

Sarah Megginson

Sarah Megginson
Head of Editorial

How can compound interest help you grow your savings?

compound interestCompound interest can turn a small amount of money today into a large amount of money over the space of 10, 20 or 30 years.

The longer your timeline ahead of you, the more you stand to benefit from compound interest. For example, if you are 22 years old and set some savings aside for retirement at age 65, you have 43 years of compound growth in your future.

How do banks calculate compound interest?

Interest is typically calculated on a daily basis on the daily closing balance. Here's the savings account equation:

  • Daily closing balance x interest rate (as a percentage) / 365

Interest begins to accumulate on the day the opening deposit is made in your savings account. It's then usually credited into your account on the last day of each month. If you choose to close your account, your accrued interest will be deposited on the day it's closed.

Any interest awarded to your savings account is usually available for use on the same day it's been credited. The daily closing balance of your savings account tends to include all cleared and uncleared transactions. This may be because electronic transfers to your linked bank account usually occur on a business day.

Alanna Glenn

I would almost always put money into a savings account over a term deposit. Savings accounts earn compound interest (meaning you earn interest on the interest paid), whereas most term deposits only earn simple interest (meaning you earn interest only on the initial deposit).
— Alanna Glenn, lead publisher (money)

How do you find the monthly interest rate?

The monthly variable interest rate will be clearly displayed on the provider's website under the product description for the particular account you’re looking at. Instead of going to each bank's website, you can take a look at the latest high interest savings account interest rates in our guide. It is important to remember that the interest rate is variable, meaning it will change from time to time.

What are the pros and cons of compound interest?

Pros

  • Easy access to your money. The majority of Australian savings accounts that provide compound interest allow you to make withdrawals and additional deposits whenever you need to.
  • Lower balance requirements. Many accounts that offer compound interest do so with a low minimum balance requirement.
  • Bonus rates. You can find savings accounts with compound interest that do give you an incentive of bonus interest for not making any withdrawals in a month.
  • Increased interest income. With compound interest, your earnings are being increased exponentially, as each month the interest is being calculated on a slightly higher balance.

Cons

  • Lower rates. The annual rates are usually not as high as accounts like term deposits, where your money is locked into an account for a set period.
  • Accessibility. For some Australians, having open access to your savings isn't ideal, as you can easily dip into it for daily needs, causing you to lose a portion of your interest earnings.
  • Timeline. To really get the benefits of compounding, you want to be in it for the long haul. You may get better returns on your money in other ways if you have a shorter timeline to work with.
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