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How compound interest works in savings accounts
At a 2.0% rate compounded monthly, $2,000 earns $40.37 after one year, $0.37 more than simple interest.
Yahoo Finance explains that compound interest can help savings grow faster because deposit interest is calculated on both the original principal and previously earned interest.
The article contrasts compound interest with simple interest using the same example, a $2,000 balance at a 2.0% rate, where simple interest would yield $40.00 after one year.
It says that if the account compounds monthly, the same $2,000 would earn $40.37 after one year, and the difference grows over time, with the gap widening at a five-year horizon.
The piece also notes that compound frequency matters, interest is typically compounded daily or monthly for savings products, and banks often advertise annual percentage yield, or APY, to reflect both the interest rate and how often it compounds.