When it comes to increasing the balance in your savings account, compound interest can be a game-changer. With compound interest, you earn interest on both the initial principal in your account and the accumulated interest earnings, which maximizes the growth potential of your savings balance.
And, one way to earn this type of interest is by parking your funds in a high-yield savings account with a competitive annual percentage yield (APY). While the APYs can vary by bank or financial institution, the current elevated interest rate environment has led many — especially online banks — to offer APYs of 5.25% or higher on your money. That's huge — especially compared to the average 0.45% APY offered by regular savings accounts.
That type of rate can have a big impact on the earning potential of your savings, especially if you approach it with a solid savings plan in place. Find out the top savings rates you could qualify for here and start earning more interest!
How much can you earn with a 5.25% APY on your savings?
In most cases, the compound interest on savings accounts is recalculated daily. This is called daily compound interest — but what does that mean for your savings? Unlike simple interest, which accrues solely on your initial deposit, daily compound interest takes into account both your principal and the interest earned, recalculating it daily. This increases the earning potential for your savings.
Below, we'll break down a few examples of how this type of interest works on a high-yield savings account with a 5.25% APY.
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Example 1: Starting small
Imagine you deposit $1,000 into a savings account with a 5.25% APY that compounds interest daily. You plan to leave your money untouched for five years. Here's how the magic of daily compounding unfolds:
- After one year, your balance is approximately $1,052.68.
- After two years, it grows to about $1,106.56.
- After three years, you're looking at approximately $1,163.17.
- After four years, your balance climbs to around $1,222.87.
- After five years, your nest egg stands at roughly $1,286.01.
In this scenario, your initial deposit was $1,000, but daily compound interest generated $286.01 in earnings in year five.
Example 2: Building over time
Now, let's apply daily compound interest to a savings strategy with consistent monthly deposits. You decide to contribute $100 into the same 5.25% APY savings account every month for five years. This is how daily compounding amplifies your returns:
- After one year, your balance is approximately $1,268.50.
- After two years, it blooms to about $2,560.52.
- After three years, you're looking at approximately $3,889.11.
- After four years, your wealth reaches around $5,263.49.
- After five years, your financial nest stands at approximately $6,692.80.
In this scenario, your total contributions amounted to $6,000, but thanks to daily compound interest, your earnings tally up to $692.80.
Example 3: A lump sum investment
Now let's examine the potential of a lump sum investment. You deposit $10,000 into a savings account boasting a 5.25% APY that compounds interest daily. You intend to keep it untouched for five years, letting the magic of daily compounding work for you. Here's what you end up with:
- After one year, your balance is approximately $10,528.43.
- After two years, it swells to about $11,084.80.
- After three years, you're looking at approximately $11,675.74.
- After four years, your wealth climbs to around $12,303.45.
- After five years, your financial growth reaches approximately $12,969.96.
In this case, your initial deposit was $10,000, and daily compound interest has generated an impressive $2,969.96 in earnings.
Let's compare the three scenarios through the lens of daily compound interest:
Building over time
- Total contributions over five years: $6,000
- Total balance after five years: $6,692.80
- Total interest earned after five years: $692.80
A lump sum investment
The bottom line
Daily compound interest is a financial superpower that can substantially boost your savings. And, with a 5.25% APY, your earnings can vary based on your deposit size and investment horizon. But whether you begin with a small deposit, make regular contributions or inject a lump sum into a high-yield savings account, the daily compounding effect can help you achieve your financial goals.
To maximize the power of daily compound interest, be sure to choose a strategy that aligns with your unique financial objectives and start early. The sooner you begin, the greater the potential for your money to work for you.
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