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What is Compounding Interest?

Compound interest is one of those things that can either work in your favor (as with saving and investing) or hurt you (as with credit card debt and student loans). In this article, we’ll explain what compound interest is and how you can take advantage of it to grow your savings.


What is compound interest?

The term “compound interest” refers to the concept of earning interest on the interest you’ve already earned.

So, what does this look like? Every month, you earn interest on your savings account balance. That interest is added to your balance ($50 balance plus $1.50 in interest = a new balance of $51.50). Even if you didn’t deposit anything into your savings the following month, $51.50 would become $53. As you can see, regular deposits to your savings and investment accounts can add up quickly with compounding interest as the wind in your sails.


How to take advantage of compound interest

Now that you understand what compound interest is, let’s look at how you can make the most of this nifty financial trick.


Save more by starting early

As with any savings strategy, the earlier you start saving, the better off you’ll be. This is especially true with compounding interest, depending on how frequently your account compounds.


Understand APY

APY stands for Annual Percentage Yield. This number shows the effective interest rate of a savings account, once compounding interest is accounted for. Looking at APY instead of just the advertised interest rate will give you a better idea of which savings account offers the most potential for growth.


Investigate the frequency of compounding interest

The more frequently interest compounds, the better. Be sure to check how often interest compounds in your account, as an account with a higher compounding frequency can ultimately yield more than an account with a higher APY that compounds less frequently.


Try not to touch your savings

Of course, sometimes you’re saving for a specific goal, such as holiday spending or a vacation. In that case, you withdraw the amount you need once you’ve reached your goal. But when it comes to long-term savings goals, such as retirement, the more you can leave your savings alone, the better compounding interest will work for you.


Open a high interest CD to grow your savings!

If you’re looking for the best savings account in Virginia and North Carolina to grow your nest egg, check out our current CD specials. Take advantage of our competitive APY to put compounding interest to work for you. You can use our compound interest calculator to test different scenarios. Visit our blog and Financial Wellness Center for additional financial resources and articles!