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How Does Compound Interest Affect My Savings Account?

Information verified correct on February 27th, 2017

Compound interest can increase your earnings exponentially.

If you want to see the best returns on your savings balances, you need to be comparing more than just interest rates. How and when interest payments are made can have a big impact on your savings potential. A feature like compound interest actually allows you to earn money on the money that you have already earned.

How do the banks calculate compound interest on my savings account?

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

Screenshot 2015-10-14 11.07.03

Interest beings 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 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.

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

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How does compound interest work in technical terms?

A savings account with compound interest is applying the interest to interest that has already been paid to you. This occurs with accounts where interest is paid directly into the account on an on-going basis. This differs from what is referred to as simple interest, which is only paid into the account at the end of a specified term, even though it is being calculated on the daily balance.

There is a formula that can assist you in seeing how beneficial compound interest can be to your savings:

Screenshot 2015-10-14 10.57.13where:

  • A = the future value of the entire investment, including the earned interest
  • P = your initial deposit amount or principal investment
  • r = the interest rate annually as a decimal point
  • n = how often interest is compounded each year
  • t = the number of years the money is invested for

In most cases the interest will be compounded monthly, or 12 times in a year if you are looking at a standard savings account, and annually if you are trying to calculate the interest earnings on a long term term deposit.


To better understand the benefit of compound interest, take a look at how John Smith’s savings grow when he invests $5,000 into a standard savings account that is paying interest at a rate of 3.5% per annum (p.a.). Interest is being calculated daily, and the payments are being made directly into the account once a month:

Principal (P)Rate (R)Compound (n)Time (t)Interest earned after one year
$5,0003.5% p.a.121$177.83

If John continues at that same rate for next five years, he will earn a total of $954.71 in interest, yet if he had chosen an account which pays interest once a year, the total earnings would be $938.43 after five years.

Principal (P)Rate (R)Compound (n)Time (t)Interest earned after five years
$5,0003.5% p.a.125$954.71

Alternately, this is how interest earnings would look after five years in an account where interest is paid annually:

Principal (P)Rate (R)Compound (n)Time (t)Interest earned after five years
$5,0003.5% p.a.15$938.43

Keep in mind that in order for these calculations to be accurate, you cannot make any withdrawals or have any fees deducted from the balance during that time period. Adding to the balance will also change your results.

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What is interest?

Similar to the interest you pay on your loan, you can also earn interest on the money that you're lending to the bank. Interest is the money the bank pays you as a return for depositing money with the bank. A number of factors affect the amount of interest you receive:

  • The interest rate
  • How it's calculated
  • How often it's paid

The interest rate is normally stated as an annual percentage, the higher the rate, the more you earn.

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What are the pros and cons of compound interest?

While it may seem like choosing an account with compound interest should be your only option for maximum benefit, there are other things to take into consideration. Think about the pros and cons of compound interest before you dismiss those accounts which don’t offer it:


  • Account accessibility. The majority of Australian savings accounts that provide compound interest do so without any set terms. These on call accounts 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. This encourages you to save, yet still gives you access to your money easily in case of an emergency.
  • 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.


  • Lower rates. The drawback to earning compound interest is that the annual rates are not usually as high as accounts like term deposits where interest is not compounded monthly.
  • Accessibility. For some Australians, having open access to your savings is a discouragement, as you can easily dip into it for daily needs, causing you to lose a portion of your interest earnings.
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How do I make the most of our compound interest?

In order to receive the maximum benefit from an account with compound interest, you should start saving as early as possible, and avoid making any unnecessary withdrawals. Other things to avoid include:

  • Losing out on bonus interest. If you are earning compound interest with an account that has terms for bonus interest, be diligent about meeting those terms each month.
  • Paying fees. Many savings accounts require that they be linked to your transaction account in order to put money in and take money out. Look at the features of these transaction accounts as well, and make sure that you are not paying excessive fees each month.

Frequently asked questions

How can I tell if a savings account pays compound interest?

You will want to first look at when interest is paid, and then where. Interest that is paid monthly into the savings account will be compounded. You need to read the fine print however, on some term deposits for example, you can choose to have monthly interest payments, but these are paid into your linked account, not added to your balance.

If my savings account requires a minimum monthly deposit, will my earned interest count towards that?

In most instances no, the minimum monthly deposit requirement must be met with other funds.

Will my interest earnings be taxed?

Banks are required to withhold tax on your interest earnings. The amount depends on your personal circumstance. To avoid having tax withheld at the highest marginal rate, you should always include your tax file number (TFN) and exemption codes on your application.

Search and compare savings accounts

Rates last updated February 27th, 2017
Maximum Variable Rate p.a. Standard Variable Rate p.a. Bonus Interest p.a. Fees Min Bal / Min Deposit Interest Earned
ING DIRECT Savings Maximiser
Ongoing, variable 3.00% p.a. when you link to an ING Orange Everyday bank account and deposit $1,000+ each month. Available on balances up to $100,000.
3.00% 1.60% 1.40% $0 $0 / $0 Open More
Bankwest Hero Saver
Ongoing, variable 2.65% p.a. rate when you deposit at least $200 each month and make no withdrawals. Available on balances up to $250,000.
2.65% 0.01% 2.64% $0 $0 / $0 Open More
Bank Australia Bonus Saver Account
Ongoing, variable 2.60% p.a. when you deposit at least $100 and make no withdrawals. Available on the entire balance.
2.60% 0.15% 2.45% $0 $0 / $1 Open More
ME Online Savings Account
Ongoing, variable 3.05% p.a. rate when you link to a ME Everyday Transaction account and make a weekly purchase with your Debit MasterCard using tap & go. Available on balances up to $250,000.
3.05% 1.30% 1.75% $0 $0 / $0 Open More
Bank Australia mySaver Account
Ongoing, variable 2.60% p.a. when you deposit $10+ each month. Available on the entire balance and to customers under the age of 25.
2.60% 0.15% 2.45% $0 $0 / $10 Open More
ANZ Progress Saver
Ongoing, variable 1.91% p.a. when you link to any Australian everyday bank account and deposit $10+ each month. Available on the entire balance.
1.91% 0.01% 1.90% $0 $10 / $10 Open More
Bank Australia Online Saver Account
Ongoing, variable rate up to 1.65% p.a. when you link to a Bank Australia Everyday Access or Pension Access or a mortgage offset account. Available on balances more than $5,000.
1.65% 1.65% 0.00% $0 $150,000 / $5,000 Open More
Westpac eSaver
Introductory rate of 2.51% p.a. for 5 months, reverting to a rate of 1.05% p.a. Available on the entire balance.
2.51% 1.05% 1.46% $0 $0 / $0 Open More
ING DIRECT Savings Accelerator
Ongoing, variable 2.35% p.a. applies on balances $150,000 and over.
2.35% 2.35% 0.00% $0 $0 / $0 Open More
BankSA Maxi Saver
Introductory rate of 2.75% p.a. for 3 months, reverting to a rate of 1.00% p.a. Available on the entire balance.
2.75% 1.00% 1.75% $0 $1 / $1 Open More
ANZ Online Saver
Introductory rate of 2.65% p.a. for 3 months, reverting to 1.25% p.a. Available on the entire balance.
2.65% 1.25% 1.40% $0 $0 / $0 Open More
Bank of Melbourne Maxi Saver
Introductory rate of 2.75% p.a. for 3 months, reverting to 1.00% p.a. Available on the entire balance.
2.75% 1.00% 1.75% $0 $1 / $1 Open More
BankSA Incentive Saver Account
Ongoing, variable 1.75% p.a. when you make at least one deposit each month and no withdrawals. Available on the entire balance.
1.75% 0.01% 1.74% $0 $0 / $0 Open More
Bank of Melbourne Incentive Saver
Ongoing, variable 1.75% p.a. when you make at least one deposit and no withdrawals each month. Available on the entire balance.
1.75% 0.01% 1.74% $0 $1 / $1 Open More
Westpac Reward Saver
Ongoing, variable 1.75% p.a. when you deposit at least $50 and make no withdrawals each month. Available on the entire balance.
1.75% 0.01% 1.74% $0 $0 / $0 Open More

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Shirley Liu

Shirley is's publisher for banking and investments. She has completed a Masters in Commerce (Finance) and is the author of hundreds of articles. She is passionate about helping Aussies make an informed decision, save money and find the best deal for their needs.

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