Some offers on this page are from advertisers who pay us, which may affect which products we write about, but not our recommendations. See our Advertiser Disclosure . What is compound interest, and how is it calculated? Learn how to calculate exactly how much your bank account will earn. Kate Rockwood Tue, August 11, 2026 at 12:30 PM PDT 4 min read One of the upsides to keeping your money in a bank account is the chance to earn compound interest you earn interest on both the funds you deposit in an account and on the interest that money earns. On the flip side, when you use a credit card, you're charged interest on the unpaid interest. While compound interest increases the cost of borrowing, it's your best friend if you're trying to build up your savings. Here's how compound interest works. See how much your savings can grow over time with our compound interest calculator Simple interest vs. compound interest With simple interest, you earn interest only on the money you deposit, not on the interest your money earns. Let's say you put $2,000 into an account with a simple interest rate of 2%. At the end of one year, you would earn $40 in interest if you didn't add or take out any money. That's because 2% of $2,000 is $40. Most savings accounts high-yield savings accounts , money market accounts, and certificates of deposit earn compound interest, helping your assets grow faster. With compound interest, you earn interest on all the money in your account, including earned interest. Using those same figures from above, if you added $2,000 to a savings account with an interest rate of 2% that compounds monthly, you would earn $40.37 in interest at the end of one year, or $0.37 more than with simple interest. An extra $0.37 probably doesn't seem like much, but at the end of five years, you would earn $210.16 in interest, or $10.16 more than from simple interest. Savings accounts typically compound daily or monthly. That means interest will be calculated and added to the account every day or every month. The more often interest compounds, the more interest you earn. How to earn more money with compound interest Certain factors can help you get the most out of compound interest: Interest rate : The higher the account's interest rate, the more money you can earn. With most savings accounts, banks advertise annual percentage yield, or APY, to signify how much the account will earn with compounded interest in one year. The APY reflects the interest rate and how often interest compounds. The higher the APY, the better. Compound frequency : The more regularly the interest compounds say, daily versus monthly the faster your money will grow. If you add $2,000 to an account earning 2% interest that compounds daily, you would earn $40.40 in interest in one year. If the account compounds monthly, you would earn $40.37. If you have a large amount of money in...
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