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Compound Interest: How high-yield savings accounts make you money

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High-yield savings accounts offer a safe way to build wealth through compound interest. Risky investments offer the potential for higher returns but also come with a much higher degree of risk.

With high-yield savings accounts you get stable and consistent growth through the power of compound interest.

How compound interest works with high-yield savings accounts

Compound interest grows upon itself. Think of it as the “snowball effect.” When a snowball rolls down a hill, it continuously picks up snow – the bigger the snowball gets, the more snow it packs on – it compounds during its travel down the hill.

A high-yield savings accounts can be looked at in the same way.

Interest is earned on money that previously earned interest. This cycle leads to increasing interest as high-yield savings account balances get bigger and bigger.

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High-yield savings accounts make you money

Compound interest is the key to how high-yield savings accounts make you money. Currently, the average annual percentage yield across all savings accounts is just 0.08 percent, according to the Federal Deposit Insurance Corp.

High-yield savings accounts currently earn around 25 times more than the national rate. That makes a big difference in what 0.08 percent will make you. For example:

  • You put $10,000 in a savings account that earns compound interest at 0.08% percent per year. Assuming interest compounds on a monthly basis, in one year you'll have made $8.00. In five years, you'll have made $40.00.
  • You put $10,000 in a savings account that earns compound interest at 2.00% percent per year (25x the national average.) Assuming interest compounds on a monthly basis, in one year you'll have made $202.00. In five years, you'll have made $1,051.00.

If you’re not earning that “interest on interest” in a high-yield savings accounts, you’re leaving money on the table.

The power of compound interest in wealth building

The beauty of compound interest is that it reinvests the interest you've earned so that you're essentially building interest on interest. By leaving your money in an account that grows it, you’ll end up with a healthy savings account.

Earning compound interest is easy. You don’t have to do anything except get money in an account, keep it there and let compound interest do its thing.

Albert Einstein referred to compound interest as “magic” and called it “The most powerful force in the universe…”.

At many banks, especially online banks, interest compounds daily and gets added to your account monthly, so the process moves even faster.  Although the difference is not significant until you're working with hundreds of thousands of dollars.

But no matter whether you start saving a lot or a little, the key is to start saving using compound interest. Save what you can – compound interest will do the rest of the work for you.

How much high-yield savings accounts can earn

Different amounts of interest earned after depositing $5,000 in a savings account and adding $100 every month for 10 years.

The figure above breaks down how much different savings accounts can yield using an initial deposit of $5,000 into an account with a 1.15 percent APY, plus adding $100 every month and never incurring any fees.

If you keep saving for 10 years, you'll have about $18,332 in your account and you'll have made $1,332 in interest. That's a nice chunk of money earned in interest.

Restrictions on savings accounts

While savings accounts are the most reliable and safe investments, they do have a few restrictions. Many high-yield savings accounts have minimum balance requirements and penalize you with fees or lower APYs if you don't maintain that level of investment.

Plus, due to a Federal Reserve Board rule known as Regulation D, account holders are only allowed to withdraw or transfer money six times per month without paying a penalty. However, since the COVID-19 outbreak, the Feds removed this limitation; although some banks have chosen to maintain the 6 withdrawals per month limitation.

Some savings account don’t offer an ATM card. But if your goal is to build wealth and earn as much compound interest as possible, you don't want to make too many withdrawals anyway.

How to find a high-yield savings account that pays compound interest?

When opening a high-yield savings account look for accounts that compound daily. But keep in mind you might only see interest payments added to your account monthly. Other features of a high-yield savings account would be:

  • Free account. Avoid high-yield savings accounts that charge a monthly maintenance fee. You don’t want to dive into your compound interest earning by paying a monthly fee.
  • Free ATMs. Look for a bank that will not charge you for using out-of-network ATMs or banks that offer ATM reimbursement in case you use another bank’s ATM. Using ATMs that aren’t affiliated with your bank can lead to charges from the ATM provider and your bank.
  • Minimum balance to earn interest. Avoid banks that offer high-yield savings accounts that require a minimum balance to earn interest.
  • Minimum balance to avoid fees. Some banks charge a fee if you don't keep a certain amount of money in your account at all times.
  • Higher APYs: High-yield savings accounts generally offer significantly higher interest rates than traditional savings products. That means you can earn more on your money and meet your savings goals faster.

Online high-yield savings accounts are a good place to start

Online high-yield savings accounts typically offer the best place to save your money. It's important to get a competitive rate for compound interest to work for you. You don't need to earn the best rate on the planet, but you should at least earn a competitive rate.

Because online-only banks don’t have to worry about the costs of running a brick-and-mortar facility, they are more likely to offer higher rates on savings accounts.

Our top picks for high-yield savings accounts with no monthly fees

1. CIT Bank Savings Builder Account — 0.40 percent

CIT Bank is one of the best online savings accounts offering a stellar interest rate. It only requires a minimum deposit of $100 to open an account. CIT Bank does not charge a monthly fee.

CIT Bank, National Association is an FDIC-insured bank founded in 2009 and currently headquartered in Pasadena, CA. June 2017 regulatory filings state the bank has equity of $5.36 billion on $41.18 billion in assets. According to Bankrate, CIT Bank, National Association exhibits a superior condition, earning a full 5 stars for safety and soundness.

Minimum balance: $100 to open
Monthly fee: None
Requirements: Make at least one single deposit of $100 or more every month or deposit $25,000.

Learn More


2. Chime Savings — 0.50% percent

The Chime Savings Account offers an APY of 0.50%. With interest compounded daily, the Chime Savings Account will maximize your money. You can open the account with $0 deposit but you must first open the Chime Spending Account.

Minimum balance: $0
Monthly fee: None

Learn More


Consider a Money Market Account

CIT Bank Money Market Account — 0.45 percent

The money market account from CIT Bank is also a good option for high-yield earnings. Money market accounts are very similar to savings accounts in that they are an interest-bearing account that provides the account holder with limited check-writing ability and a debit card. Account-holders get the benefits of both savings and checking accounts.

Minimum balance: $100 to open
Monthly fee: None

Learn More

Final thoughts on high-yield savings accounts

Consistent investing in a savings account over a long period of time can be an effective strategy to accumulate wealth. Even small deposits to a high-yield savings account can add up over time.

Start your snowball now by earning compound interest in a high-yield savings account today. You’ll never regret it.

Once your high-yield savings account grows, the next step is to consider higher-risk investments. Savings accounts are best for:

  • Emergency funds.
  • Saving for a downpayment for home or car.
  • Unexpected expenses.
  • Quick access to money when life throws you a curveball.

Final thoughts on high-yield savings accounts

Consistent investing in a savings account over a long period of time can be an effective strategy to accumulate wealth. Even small deposits to a savings account can add up over time. Start your snowball now by earning compound interest in a high-yield savings account today. You’ll never regret it.

Once your high-yield savings account grows, the next step is to consider higher-risk investments. Savings accounts are best for:

  • Emergency funds.
  • Saving for a downpayment for home or car.
  • Unexpected expenses.
  • Quick access to money when life throws you a curveball.

Consider Investing

Investing can be complicated but it's also one of the quickest and most effective ways to make your money grow. If you're new to investing take a little time to learn how to research and evaluate potential stock purchases, dividends, mutual funds, exchange-traded funds (ETFs) and other investment vehicles.

You can invest on your own but it's probably best to start with a broker. But remember that brokerage firms charge different amounts to use their services, and the fees may vary by how much you have in your accounts. Fees can eat up a big chunk of your savings, so be sure you shop around to find the fee schedule that costs you the least before high risk investing.

It's important to keep in mind the risks that come with investing in stocks. Many people saw their investing portfolios lose half their value or more during the Great Recession, but those who held on saw their investments recover and then some within a few years.

Few investments come without risk, unless it's a high-yield savings account. The ones with the greatest risk stand to bring the greatest gains, but also the greatest loses.

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