2.2.3 Interest

Savings accounts usually pay interest on the money that you deposit. The interest you earn on money you save will add to your savings, especially if you have a higher-interest savings account.

Savings accounts normally pay compound interest—you receive interest on interest previously paid into your account. This way, every time your financial institution pays you interest, you'll receive a little more and your savings grow faster.

Some investments pay simple interest. With simple interest, the amount of interest is calculated on the original amount only, not on the interest added to the account. These investments usually pay a slightly higher rate of interest. However, compound interest is the standard for savings accounts.

For example, compare these three savings accounts:

Savings account #1	Savings account #2	Savings account #3
Pays simple interest	Pays compound interest	Pays compound interest
Pays 1.5% interest per year	Pays 1.5% interest per year	Pays 2.0% interest per year
If you deposit $10,000: after one year, you will receive $150 interest after two years, you will receive $150 interest after ten years, you will receive $150 interest after ten years, your savings will have grown to $11,500	If you deposit $10,000: after one year, you will receive $150 interest after two years, you will receive $152.25 interest after ten years, you will receive $171.51 interest after ten years, your savings will have grown to $11,605.41	If you deposit $10,000: after one year, you will receive $200 interest after two years, you will receive $204 interest after ten years, you will receive $208.08 interest after ten years, your savings will have grown to $12,189.94

Savings account #1

Savings account #2

Savings account #3

Pays simple interest

Pays compound interest

Pays 1.5% interest per year

Pays 2.0% interest per year

If you deposit $10,000:

after one year, you will receive $150 interest
after two years, you will receive $150 interest
after ten years, you will receive $150 interest
after ten years, your savings will have grown to $11,500

If you deposit $10,000:

after one year, you will receive $150 interest
after two years, you will receive $152.25 interest
after ten years, you will receive $171.51 interest
after ten years, your savings will have grown to $11,605.41

If you deposit $10,000:

after one year, you will receive $200 interest
after two years, you will receive $204 interest
after ten years, you will receive $208.08 interest
after ten years, your savings will have grown to $12,189.94

Financial institutions usually calculate the amount of interest to pay each month. Some calculate the amount daily and pay the amount into your account at the end of the month. Some calculate it on the lowest amount you had in the account over the month. If they calculate it daily, you'll save a little faster.

Of course, you'll save more if you make regular contributions to your savings account.

Try the interest calculator below to see how much you could save.