What is compound interest?

Compound interest is when the interest you earn, earns interest. It helps boost the growth of your money over time. You should compare savings account yields by looking at annual percentage yields (APYs).

How does compound interest work in a savings account?

In year two, you would earn 5% on the larger balance of $1,050, which is $52.50—giving you a new balance of $1,102.50 at the end of year two. Thanks to the magic of compound interest, the growth of your savings account balance would accelerate over time as you earn interest on increasingly larger balances.

Is $0.49 a compound interest?

The $0.49 is compounded interest earned from the first to second year, as it is interest earned on top of the initial $7 in interest earned after the first year. The $7 gained in year one is simple interest. After this initial simple interest, that’s when the interest starts earning interest which is what is defined as “compound interest.”