A compound-interest savings account adds credited interest to its balance, so later interest can build on the original deposit and earlier interest. The phrase describes how earnings accumulate, not a standard account with one set rate or terms. The account agreement determines the rate, how often interest compounds and is credited, fees, and access conditions.
What two years of compounding changes
Hypothetical calculation: a $5,000 starting balance at a fixed 10% annual rate for three years. Compound interest is credited and reinvested annually; simple interest is calculated only on the original $5,000. No deposits, withdrawals, fees or taxes; this is not a bank offer.
| Year | Simple interest earned ($) | Simple-interest total ($) | Compound interest earned ($) | Compounded balance ($) |
| 1 | 500.00 | 5,500.00 | 500.00 | 5,500.00 |
| 2 | 500.00 | 6,000.00 | 550.00 | 6,050.00 |
| 3 | 500.00 | 6,500.00 | 605.00 | 6,655.00 |
With simple interest, interest is calculated on the original principal. With compound interest, credited interest can earn interest too if it stays in the interest-bearing balance. At a hypothetical fixed 5% annual rate for two years, $1,000 grows to $1,102.50 with annual compounding, compared with $1,100 under simple interest.
At the same hypothetical rate and schedule, $100,000 becomes $110,250, earning $10,250 before taxes, fees, or withdrawals. This is a calculation, not an account offer.
The formula behind a compounding balance
The basic formula is A = P × (1 + i)^t. A is the ending balance, P is the starting principal, i is the interest rate for each period, and t is the number of periods. The rate and period count must use matching time units.
For a nominal annual rate r compounded n times per year over t years, the formula is A = P × (1 + r/n)^(nt). More frequent compounding produces a higher effective yield when the nominal rate is the same. These formulas assume the stated rate and schedule hold, with no extra deposits, withdrawals, taxes, or fees.
Monthly deposits add another variable
Regular contributions can compound alongside the starting balance. In a hypothetical projection, depositing $100 at the end of each month for 10 years, with a 5% annual return compounded monthly, produces about $15,528 from $12,000 in contributions. The assumed return is not guaranteed. A contribution made at the start of a period has more time to compound than one made at the end.
What to check in a U.S. account disclosure
For accounts covered by Regulation DD, the Consumer Financial Protection Bureau (CFPB) requires disclosures, as applicable, about the interest rate, annual percentage yield (APY), compounding and crediting frequency, balance requirements, fees, and transaction limits. The disclosures are provided before an account is opened. The CFPB’s account-disclosure rules provide a useful framework for checking an offer’s terms.
Compare APY and the rate schedule
APY is an annualized measure that reflects the interest rate and compounding frequency. Compare APYs rather than nominal interest rates alone, and check whether the rate is fixed or variable. A fixed-rate disclosure states how long the rate applies. A variable-rate disclosure explains that the rate may change and how and when changes can occur.
An introductory rate may apply only for a stated period before another rate takes effect. Read the schedule and the later rate, not just the opening figure. For a tiered-rate account, check whether a rate applies to the entire balance or only to the portion within a tier. The CFPB’s APY rules explain that APY reflects interest, while a separate opening bonus is not part of that yield.
Separate accrual, compounding, and crediting
Accrual is when a deposit starts earning interest. Compounding is how often interest is added to the balance for future interest calculations. Crediting is when interest is posted to the account. CFPB disclosures specify the compounding and crediting frequencies separately, so check both rather than assuming they match. The terms also state when interest begins to accrue on noncash deposits such as checks.
Check what happens if you close an account before accrued interest is credited. Under applicable disclosures, an account may state that uncredited interest will not be paid if it is closed early.
Read the balance, fee, and withdrawal conditions
An account may set minimum balances to open it, avoid a fee, or earn the disclosed APY. Check how the balance is calculated and whether fees apply, including their amounts and conditions. Review any limits on deposits or withdrawals as well.
For a time account, such as a certificate of deposit, check the maturity date and any early-withdrawal penalty before opening it. The terms explain how a penalty is calculated and when it applies. Withdrawing interest before maturity can also reduce earnings.
Investment returns do not work like a fixed savings rate
A fixed-rate calculation is not a promise about an investment. Share and fund returns vary, and an investment can lose value. The S&P 500 has no guaranteed bank-account interest rate. Memorias de Tiburón’s animated examples compare simple and compound growth using hypothetical investment scenarios based on an assumed 8% annual S&P 500 return.
Investment losses, inflation, and fees can affect an invested balance, while compounding can also increase debt when unpaid interest is added to the amount owed. Cristina Dayz discusses these limits, along with slow early growth and the time involved, in a Spanish-language explainer.
