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High-yield savings accounts and compound interest: What savers should know now

With compound interest, you earn more on the money you've saved without any extra effort on your part. /Getty Images

Savings are vital to securing a stable and secure financial future. A healthy savings account balance can help you weather setbacks like emergency expenses or job loss and achieve your goals without going into debt.

There are many ways to grow your savings faster, but one of the easiest is by taking advantage of compound interest. With compound interest, you earn more on the money you've saved without any extra effort on your part.

But what exactly is compound interest, and how does it boost your savings? The answer is simpler than you might think.

See today's top savings accounts here.

High-yield savings and compound interest: What savers should know now

One of the benefits of savings accounts is that they earn interest. Essentially, the bank pays you a certain amount for keeping your money with it. This amount is calculated based on the account's interest rate.

For example, say you deposit $1,000 in an account with a 4% interest rate. If interest is calculated monthly, you'll earn $40 interest the first month the account is open, bringing your balance to $1,040. The next month, you'll earn another $40 on your $1,000 initial deposit, bringing your total to $1,080.

This example uses simple interest, which calculates your earnings based solely on your initial account balance. With compound interest, however, you earn interest not just on your initial balance but also on the interest you've earned to date.

Using the numbers from the previous example, with compound interest, you'd earn $40 interest the first month the account is open, again bringing your balance to $1,040. But at the end of the second month, you'll earn $41.60 on this new $1,040 balance, bringing your total to $1,081.60.

This difference can add up quickly over time. When you earn interest on your interest, your savings can grow much faster than if you were just earning simple interest.

View high-yield savings accounts here and earn more interest on your money.

How to maximize the power of compound interest

To maximize the benefits of compound interest, it's important to start saving as early as possible. The earlier you start, the more time the interest will have to compound.

The size of your balance also affects your earning potential. So, the more you can put into your savings account, the more interest you'll earn, enabling your balance to grow exponentially. You can boost your savings by taking steps like trimming your budget or getting a side hustle.

In addition, it's crucial to compare savings accounts to find the one that offers the best interest rate and lowest fees. You can do this by opening a high-yield savings account.

High-yield savings accounts provide interest rates 10 times higher than regular savings accounts (if not more). That said, even among high-yield accounts, you'll find a variety of rates, so take the time to shop around to get the most for your money.

Start growing your savings faster with one of these high-yield accounts.

The bottom line

Compound interest is a powerful tool that can help you grow your savings faster over time. By understanding the basics of compound interest and maximizing its benefits with smart financial planning and a high-yield savings account, you can take control of your financial future and achieve your long-term goals more quickly.

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