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.
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.
The best way to explain how compound interest works is with an example.
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.
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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
Head of Editorial
Compound 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.
Interest is typically calculated on a daily basis on the daily closing balance. Here's the savings account equation:
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.
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)
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.
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Karen Eley is the founder of Women Talking Finance, which provides money coaching and financial literacy and education services. An experienced and former financial adviser who has worked in financial services industry for 22 years, Karen is a Certified Money Coach (CMC), holds a Bachelor of Accounting and an Advanced Diploma in Financial Planning and CFP.
The Australian Unity Freedom Saver account lets you earn a competitive rate on balances between $50,000 and $250,000. Learn more about this high interest savings account.
The Australian Unity Freedom Saver account lets you earn a competitive rate on balances between $250,001 and $500,000. Learn more about this high interest savings account.
Check out out review of the Bank of Queensland Simple Saver Account.
The Great Southern Bank Goal Saver Account has an ongoing bonus rate on balances up to $50,000 for customers aged 18-24.
Earn 2.30% p.a. on your savings each month you make at least one deposit and make no more than one withdrawal.
The Virgin Money Boost savings account (for 18-24 year olds) offers bonus interest each month you deposit money and meet the purchase requirements. Here's how the account works and how to apply.
The Virgin Money Boost savings account (for 25+ year olds) offers bonus interest each month you deposit money and meet the purchase requirements. Here's how the account works and how to apply.
The average Australian has $37,975 in savings and saves $705 each month. Learn about this and more with our savings account statistics.
Available to SMSFs, the Rabobank Notice Saver offers a high interest rate on your savings, but you’ll need to give at least one-month’s notice before you can withdraw your funds.
The ING Savings Maximiser is a high interest savings account with a competitive interest rate when you meet the account conditions. Here's how to earn the top bonus rate with this account.