Bank of Internet USA Online Banking and Financial Blog

Information, Insights, and Expert Advice

The Power of Compound Interest

Nov 30, 2016

You know your savings account and possibly even your checking account earn interest, but do you know how much? If you are banking with some of the nation’s biggest banks, the answer may surprise you. As of April 2016, the average savings account was earning account holders only 0.06 percent.i

While it may seem like you are earning just a few cents each month, selecting a high-yield savings account with daily compounding interest can transform your savings strategy. We are here to help explain all the ways compound interest can benefit you as you plan for your financial future.

What Is Compound Interest?

Grow your money faster with a savings account that features compounding interest. Compound interest allows you to earn interest on your deposits as well as the interest you have already earned.

Compound interest can vary in the frequency with which it is applied. Your interest can compound annually, semi-annually, monthly, or even daily. To get a better estimate of what your money will be worth, you can use an interest rate calculator to predict your earnings.

Grow Your Retirement Fund

Compound interest is even more impactful as you look to save for retirement. You can build your wealth more effectively by making smart investments that allow you take full advantage of compound interest. One of the biggest benefits of compound interest is that it rewards those who begin saving early.

Here is an example of how two coworkers’ retirement savings can vary greatly due to compound interest and the timing of their respective investments:

Michael is 23 and he hopes to retire at 65 years of age. By saving $4,000 annually for 10 years, he is able to build a nice nest egg. With an 8% annual return, featuring compound interest, his nest egg will be equal to $734,530 by the time he is 65.

Jen starts saving at 33 and puts aside $4,000 a year. She continues to set aside $4,000 each year until she retires at 65. Earning the same 8% annual return, Jen will only have $579,802 when she retires.

Even though Michael deposited less money than Jen, the 10 year difference of compounding interest left Michael with $154,727 more.

 

How to Make the Most of Compound Interest

You don’t need to be a Wall Street expert to make the most out of compound interest. The key to reaping the biggest reward is to leave your investment in place. Compound interest is truly a long-term strategy.

If you are not willing to put your money in a high-risk fund, select a savings or money market account that can earn you more than the national savings average. While you don’t need to make a large initial investment, continuously adding funds can help you grow your money faster with the help of compound interest.

If you’re ready to start saving today, reach out to one of our personal banking experts to open your Bank of Internet USA savings account. Call us now at 1-877-541-2634.


[i] “What Is The Average Savings Account Interest Rate?” GoBankingRates.com. 25 April 2016. https://www.gobankingrates.com/savings-account/what-average-savings-account-interest-rate/



"The Power of Compound Interest"

This blog post was published by Bank of Internet USA on and last updated on .