Saving money isn't always easy, but there's one thing you can do to grow your nest egg without lifting a finger: Earn more interest. There are a few simple ways you can increase the interest income on your savings, including finding a competitive interest rate, choosing the right account and letting time work to your advantage through the power of compounding.
We'll review each in more detail below.
1. Look for a Competitive Interest Rate
Before you can start comparing interest rates, you need to understand how they work. Savings accounts generally pay compound interest, which means you earn interest on your deposits as well as on any interest you've already accumulated. (This is in contrast to simple interest, which pays interest on your principal deposits only.)
Compound interest is a boon to savers because it allows you to increase your balance faster. The compounding frequency—or how often interest is calculated and paid out—affects how quickly your savings grow. The greater the frequency (quarterly, monthly or daily), the more chances you give your money to compound and build on itself.
To avoid confusion, banks typically express interest rates on savings accounts as an “annual percentage yield" (APY), which already factors in the compound frequency. So, when you're assessing interest rates on different savings products, it's important to look at the APY (sometimes called the “effective interest rate") to ensure you're comparing apples to apples. Otherwise, you may not be considering the difference in interest income that can come from varying compound intervals.
2. Consider Alternatives to Traditional Savings Accounts
There are several different types of savings account options to choose from, including high yield savings, certificates of deposit (CDs) and money market accounts. There are advantages and disadvantages to each, so it's important to use the right one for your needs, as explained below.
High yield savings account
- Pros: Competitive interest rates; allows withdrawals at any time without penalty
- Cons: Interest rate may be lower than on CD accounts; rates are not locked in (which can be a pro or a con, depending on whether rates go up or down in the future)
- Ideal for: Short- to medium-term savings, or money you may need to access quickly, such as an emergency fund
CD account
- Pros: Usually pays more interest than other savings accounts; locked-in rate of interest so you can accurately predict your interest income over time
- Cons: Must leave funds in the account until maturity date (or pay a penalty to withdraw early); if interest rates increase, you're locked in at a lower rate until the CD matures (unless you opt for a bump-up CD)
- Ideal for: Medium- to long-term savings that you can safely set aside for a given period, such as saving for a future down payment on a home or for retirement
Money market account
- Pros: Higher rate of interest than checking accounts; allows more transactions than other savings accounts
- Cons: Lower rate of interest than other savings accounts; allows fewer transactions than checking accounts
- Ideal for: Funds that you might need to spend on an occasional basis, but still want to earn more interest on than is offered by checking accounts
Once you know which account type is best for your needs, compare APYs—as well as any monthly account fees or required minimum balances—to make sure you fully leverage the power of compounding.
3. Boost Your Account Balance
The bank calculates interest as a percentage of your total savings, so the higher your account balance, the more interest you'll earn. Consider the following strategies to increase your current savings account balance (as well as your interest income):
- Pay yourself first: Use a budget to figure out how much you can save each week or month, then set up automated transfers to move those amounts from your checking account to your savings.
- Add lump sums when you can: If you have occasional income—such as when you work overtime or get a seasonal bonus—deposit that money directly to savings since you likely won't miss it. The same goes for your tax refund.
- Get a side hustle: Channel income from a part-time gig or freelance work into your savings account to give your balance an ongoing boost.
4. Make the Most of Compound Interest
The way compound interest works is like a snowball that picks up increasing amounts of snow as you roll it. So, as long as you leave your savings in an interest-bearing account to compound and grow, the interest payments you receive will continue to increase in size.
Take, for example, a single $10,000 deposit with an APY of 4%. The first year, you'd earn $400 in interest. By year five, however, you'd get $468 in interest income—a 17% increase over the first year—just by leaving the savings alone to compound.
The effects become even more dramatic over time: In year 10, you'd earn $569.32; year 20 would pay $842.74 (more than twice the original interest); and you'd get $1,247.46 in year 30—which is more than three times the original interest!
And that's just from a single deposit in the first year. If you continue to deposit money each week, month or year and leave those funds in long-term savings, your interest income can really explode over time, as shown below.
Example of compound interest (4% APY on $10,000 original savings plus $200 monthly deposits)
| Year |
Annual interest |
Total balance |
| 0 |
- |
$10,000 |
| 1 |
$444 |
$12,844 |
| 5 |
$927.08 |
$25,404.02 |
| 10 |
$1,647.90 |
$44,145.37 |
| 20 |
$3,591.88 |
$94,688.86 |
| 30 |
$6,469.44 |
$169,505.56 |
Source: Compound interest calculator, thecalculatorsite.com
Earn More Interest on Your Savings Account Now
Now that you know how to maximize your savings through the magic of compound interest, take some time to review Vivid Crest Bank 's savings products, including high yield savings, CDs and money market accounts. With competitive interest rates and no minimum balance, you can get your savings snowball rolling right away.
Tamar Satov is a freelance journalist based in Toronto, Canada. Her work has appeared in the Globe and Mail, Today's Parent, BNN Bloomberg, MoneySense, Canadian Living and others.
READ MORE: Personal Finance 101: Compound Interest