Compound Interest Savings Accounts

Compare with Savvy to find the best compound interest-bearing account and fast-track your savings growth.

Last updated on May 2nd, 2022 at 11:58 am by Kurtis Eichler

Compare and find the best compound interest savings account

Compound interest is widely seen as a tried-and-true formula which can help boost your bank balance. In fact, billionaire Warren Buffett has called it an “investor’s best friend” and attributed the formula to his vast wealth.

Read more about how to compare the best savings accounts and calculate your rate of compound interest right here with Savvy.

What is compound interest?

Simply put, compound interest is interest on top of interest. The formula allows you to get a return on the money you’ve already deposited as well as the interest you’ve already accumulated in your savings account. For example, if you deposit $5,000 in an account at a rate of 2.5% p.a. compounding monthly, you would earn $525.28 in interest over four years. Long-term savers, such as people building a retirement nest egg, tend to make the most out of high compound interest, as well as those who can afford to make a hefty deposit upfront and set and forget their money.

All interest on savings accounts is calculated on a compounding basis, even accounts which give you easy access to your cash. Picking an account with more restrictive access, such as a high interest bonus saver, will allow you to boost your bank balance. Choosing the right account for you will also help accelerate the interest you earn. By comparing with Savvy, you can find an account that suits your needs and helps you hit your savings target.

How can I calculate my compound interest earnings?

The way financial institutions calculate compounding interest is relatively straightforward. The process is as follows:

  • The interest rate is divided by the frequency at which interest is compounded. For instance, if your interest compounds monthly, the bank would divide your rate by 12.
  • Add one to your divided rate and multiply this by the power of months you’ll be earning the compound interest.
  • Multiply this amount with the balance of your account.

The formula for this is will be:

End of day balance = principal x (1 + interest rate ÷ compounding frequency) time frame

If you don’t want to use messy formulas and equations, though, you can calculate what you might earn using Savvy’s compound interest calculator. This lets you calculate how much interest you can earn compounded daily, monthly or annually.

What factors can affect the compound interest I earn?

Choosing a savings account comes down to weighing up their individual factors. Whether it be finding the best interest rate or picking an account with the right accessibility, these important factors will determine the return you get on your money. Variables you’ll need to consider when opening a savings account include:

Interest rate

The strength of your interest rate will determine how much you earn on your money. The higher the rate, the more interest you’ll accrue. For instance, if you opened an account with $10,000 at a 3% p.a. interest compounded monthly over four years, you’d earn around $1,273 in interest. However, if you invested the same money at only 2% p.a., you’d earn almost $450 less over the same period.

Most savings accounts let you earn bonus high interest for meeting monthly account requirements such as minimum balances or deposits. Compare the top rates on offer, as well as base rates and the conditions required, with Savvy. The base rate is important because if you’re ever unable to meet the requirements, this is the percentage your interest will be calculated on for the month.

Reinvested interest

It may seem self-explanatory but keeping the interest you earn in your account will help grow your savings. Banks may give you the option to open a linked everyday account where your interest can be paid. However, if you want to boost your balance further, it’s wise to keep it ticking over in your savings account.

Length of time

Compound interest acts like a snowball rolling down a hill. The further it rolls, the larger it grows. That’s why having a long-term savings objective can get you the best return on your investment. For example, if you invested $15,000 at a rate of 2% p.a. compounded daily, you’d earn just over $300 interest in 12 months. However, if you left this money to build interest over five years, you’d earn almost $1,600.

Deposits

Frequently contributing to your account will help your bank balance grow faster. Try and make these deposits weekly or fortnightly, as opposed to monthly. Because interest is calculated daily, you’ll be earning more on the money you invest and bolstering your bank balance. It’s important to compare with Savvy as some accounts may require minimum deposits or opening balances. You can use Savvy’s calculator to work out how much to deposit to reach your savings goal.

Compounding frequency

The more frequently your interest is compounded, the faster your balance will grow. Interest can be compounded daily, monthly or annually, so comparing with Savvy will ensure you find the right account to achieve your savings goals faster. For instance, if you invested $100,000 at 3% p.a. compounded daily over two years, you’d earn almost $100 more than an account with interest compounding annually.

Top tips to remember before opening a savings account

Have a savings goal

Planning towards a goal, such as a deposit for a house or impending nuptials, can be a good motivator for you to squirrel money away. It’ll also make it easier to choose a savings account, as you’ll have a fair idea of what you want out of it. You can use Savvy’s online savings calculator to estimate how you can grow your savings.

Check for fees

Banks charge a range of fees for giving you a secure place to store your money. Small monthly fees for account keeping and paper statements can seem minuscule at a few dollars apiece but added up over a year have the potential to eat into the interest you earn. Comparing with Savvy will help you find an account with manageable charges.

Resist the temptation to spend

It can sometimes be tempting to dip into your savings, especially if there’s a large sum of money sitting in your account. Resisting the temptation to pick at your funds will allow your money to grow untouched and you’ll run less of a risk of losing out on a high interest rate for the month.

Comparing with Savvy

Locking in the best deal possible is one of the most important factors when opening a savings account. Savvy offers side-by-side comparisons of accounts so you can easily weigh up their interest rates, bonuses and conditions. We provide you with the tools and knowledge on how to compare deals yourself to find the best account on the market.

Frequently asked compound interest savings account questions

What are the requirements for opening a savings account?

Once you find a savings account that suits you, make sure you satisfy all the eligibility criteria. These include:

Age: The rules vary from bank to bank, but generally you must be over 12 years old to open a savings account by yourself. If you’re underage, a parent or carer must accompany you to apply to open an account at a branch.

Residency: You must be living in Australia or have a local residential address to open a savings account. This is largely for tax reasons. However, many institutions offer accounts for temporary and other non-residents.

What documents do I need to provide my institution?

Financial institutions will need to see proof of identity upon opening an account. This can be submitted at a branch or via secure online portals. Forms of photo identification can include:

Driver’s licence: Make sure to copy the front and back of your driver’s licence when submitting it as ID.

Passport: You can submit a copy of a current Australian or foreign-issued passport.

Proof of age card: State and territory-issued proof of age cards can be used as a form of ID.

Identity card: You can submit an identity card or a government-issued travel document as proof of identity.

Will I have to pay tax on my compounded interest?

Yes – any interest you earn is taxable. How much you pay depends on how much you earn and the income bracket you fall into. If your total income falls under $18,200, for instance, you won’t have to pay tax. However, if you earn over that amount, you’ll be liable to pay tax based on the ATO’s various tax rates.

What’s the difference between simple and compound interest?

Simple interest doesn’t count other interest earnings in its calculations, meaning it’s calculated solely on the money deposited, whereas compound interest is calculated based on both principal sums and interest earned. Simple interest is applied to most loans, making it more suitable for borrowers, whereas compound interest is better for savers.

If I decide to close my account, will I still earn interest for that month?

Yes – however, it depends on how often your interest is calculated. If your interest is calculated daily, you’ll earn interest up until the day your account is closed. A bank will ask you to nominate an account to pay out this money at the end of the month.

Can I open a joint account?

Yes – you can open a joint savings account. These accounts are best suited to couples saving towards a shared goal. A joint account operates very similarly to a standard savings account, except you have to opt for ‘one to sign’ or ‘both to sign’ protections on the account.