Compound interest is one of the most powerful concepts in finance. It means that you earn interest not only on your initial deposit, but also on the interest that accumulates over time. This way, your money grows exponentially and faster than with simple interest.
Compound interest can help you achieve your financial goals, whether you want to save for retirement, education, a home, or any other purpose. However, not all accounts and investments offer compound interest. Some pay simple interest, which means that you only earn interest on your principal amount. Others pay compound interest, but at a low rate or with high fees.
In this article, we will show you how to earn compound interest with the best accounts and investments available. We will compare the features, benefits, and drawbacks of different options, and give you some tips on how to choose the best one for your needs. By the end of this article, you will have a better understanding of how to grow your wealth with compound interest.
High-Yield Savings Accounts
A high-yield savings account is a type of bank account that pays a higher interest rate than a standard savings account. The average interest rate for a high-yield savings account is around 0.5%, while the average rate for a standard savings account is only 0.06%. This means that you can earn more interest with a high-yield savings account than with a regular one.
High-yield savings accounts are also FDIC-insured up to $250,000 per depositor, per institution. This means that your money is safe and protected even if the bank fails. High-yield savings accounts are also easy to open and access online or through mobile apps.
Some of the best high-yield savings accounts available are:
- Ally Bank Online Savings Account: This account offers an APY of 0.5%, with no monthly fees or minimum deposit or balance requirements. You can also make unlimited transfers and withdrawals from this account without any penalty.
- Marcus by Goldman Sachs Online Savings Account: This account offers an APY of 0.5%, with no monthly fees or minimum deposit or balance requirements. You can also make up to six withdrawals per statement cycle without any fee.
- Discover Online Savings Account: This account offers an APY of 0.4%, with no monthly fees or minimum deposit or balance requirements. You can also make up to six withdrawals per month without any fee.
The pros and cons of high-yield savings accounts are:
- Pros:
- They offer higher interest rates than standard savings accounts
- They are FDIC-insured and safe
- They are easy to open and access online or through mobile apps
- They have no or low fees and minimum requirements
- Cons:
- They still have lower interest rates than some other investments
- They may have limitations on withdrawals or transfers
- They may have variable interest rates that can change over time
To choose the best high-yield savings account for your needs, you should consider the following factors:
- The APY and how often it compounds
- The fees and minimum deposit and balance requirements
- The withdrawal and transfer limits and fees
- The customer service and online features
Also Read This: High-Yield Savings Account: How to Earn More Interest
Money Market Accounts
A money market account is another type of bank account that pays a higher interest rate than a standard savings account. The average interest rate for a money market account is around 0.1%, while the average rate for a standard savings account is only 0.06%. This means that you can earn more interest with a money market account than with a regular one.
Money market accounts are also FDIC-insured up to $250,000 per depositor, per institution. This means that your money is safe and protected even if the bank fails. Money market accounts also offer some features of checking accounts, such as debit cards, checks, and ATM access.
Some of the best money market accounts available are:
- Capital One 360 Money Market Account: This account offers an APY of 0.4%, with no monthly fees or minimum deposit or balance requirements. You can also make unlimited transfers and withdrawals from this account without any penalty.
- CIT Bank Money Market Account: This account offers an APY of 0.45%, with no monthly fees or minimum deposit requirements. You need to maintain a minimum balance of $100 to earn the APY. You can also make up to six withdrawals per month without any fee.
- Axos Bank High Yield Money Market Account: This account offers an APY of 0.6%, with no monthly fees or minimum deposit requirements. You need to maintain a minimum balance of $1,000 to earn the APY. You can also make up to six withdrawals per month without any fee.
The pros and cons of money market accounts are:
- Pros:
- They offer higher interest rates than standard savings accounts
- They are FDIC-insured and safe
- They offer some features of checking accounts, such as debit cards, checks, and ATM access
- They have no or low fees and minimum requirements
- Cons:
- They still have lower interest rates than some other investments
- They may have limitations on withdrawals or transfers
- They may have variable interest rates that can change over time
- They may have higher minimum balance requirements than high-yield savings accounts
To choose the best money market account for your needs, you should consider the same factors as for high-yield savings accounts, plus the additional features of checking accounts that you may need or want.
Also Read This: What is Money Market Deposit Account
Certificates of Deposit (CDs)
A certificate of deposit (CD) is a type of investment that offers a guaranteed interest rate for a fixed term. The average interest rate for a one-year CD is around 0.2%, while the average rate for a five-year CD is around 0.5%. This means that you can earn more interest with a longer-term CD than with a shorter-term one.
CDs are also FDIC-insured up to $250,000 per depositor, per institution. This means that your money is safe and protected even if the bank fails. CDs also offer a fixed interest rate that does not change over time, unlike variable interest rates of savings and money market accounts.
Some of the best CDs available are:
- Ally Bank High Yield CD: This CD offers an APY of 0.6% for a one-year term, 0.65% for a two-year term, 0.7% for a three-year term, 0.75% for a four-year term, and 0.8% for a five-year term. You can also withdraw your interest earned at any time without penalty. The minimum deposit is $5,000.
- Marcus by Goldman Sachs High-Yield CD: This CD offers an APY of 0.55% for a one-year term, 0.6% for a two-year term, 0.65% for a three-year term, 0.7% for a four-year term, and 0.75% for a five-year term. You can also withdraw your interest earned at any time without penalty. The minimum deposit is $500.
- Discover Bank CD: This CD offers an APY of 0.5% for a one-year term, 0.55% for a two-year term, 0.6% for a three-year term, 0.65% for a four-year term, and 0.7% for a five-year term. You can also withdraw your interest earned at any time without penalty. The minimum deposit is $2,500.
The pros and cons of CDs are:
- Pros:
- They offer higher interest rates than savings and money market accounts
- They are FDIC-insured and safe
- They offer a fixed interest rate that does not change over time
- They have no fees
- Cons:
- They have lower interest rates than some other investments
- They have limited liquidity and flexibility
- They may have early withdrawal penalties if you need to access your money before the maturity date
- They may have higher minimum deposit requirements than savings and money market accounts
To choose the best CD for your needs, you should consider the following factors:
- The APY and how often it compounds
- The term length and how it matches your time horizon
- The minimum deposit requirement and how it fits your budget
- The early withdrawal penalty and how it affects your liquidity
Other Compound Interest Investments
Besides bank accounts, there are also other types of investments that can earn compound interest. These include mutual funds, index funds, exchange-traded funds (ETFs), bonds, and more. These investments are not FDIC-insured, but they may offer higher returns and more diversification than bank accounts.
Some of the best compound interest investments available are:
- Mutual Funds: A mutual fund is a collection of stocks, bonds, or other securities that are professionally managed by a fund manager. You can buy shares of a mutual fund and receive dividends or capital gains from the fund’s performance. The average annual return for a mutual fund is around 10%, but it can vary depending on the type, risk, and fees of the fund.
- Index Funds: An index fund is a type of mutual fund that tracks the performance of a specific market index, such as the S&P 500, the Dow Jones Industrial Average, or the Nasdaq Composite. You can buy shares of an index fund and receive dividends or capital gains from the index’s performance. The average annual return for an index fund is around 8%, but it can vary depending on the index, risk, and fees of the fund.
- Exchange-Traded Funds (ETFs): An ETF is a type of security that tracks the performance of a basket of assets, such as stocks, bonds, commodities, currencies, or sectors. You can buy and sell shares of an ETF on a stock exchange like a regular stock. The average annual return for an ETF is around 7%, but it can vary depending on the asset, risk, and fees of the ETF.
- Bonds: A bond is a type of debt instrument that pays a fixed amount of interest at regular intervals until maturity. You can buy bonds from governments, corporations, or other entities and receive interest payments and principal repayment at maturity. The average annual return for a bond is around 5%, but it can vary depending on the issuer, term, rating, and interest rate of the bond.
The pros and cons of these compound interest investments are:
- Pros:
- They offer higher returns than bank accounts
- They offer more diversification and lower risk than individual stocks
- They offer more flexibility and liquidity than CDs
- They offer more tax advantages than bank accounts
- Cons:
- They are not FDIC-insured and may lose value
- They may have higher fees and expenses than bank accounts
- They may have higher volatility and uncertainty than bank accounts
- They may have lower compounding frequency than bank accounts
To choose the best compound interest investment for your needs, you should consider the following factors:
- The return and how often it compounds
- The risk and how it matches your risk tolerance
- The fees and expenses and how they affect your net return
- The tax implications and how they affect your after-tax return
- The liquidity and how it affects your access to your money
Conclusion
Compound interest is a powerful way to grow your wealth over time. It means that you earn interest not only on your initial deposit, but also on the interest that accumulates over time. This way, your money grows exponentially and faster than with simple interest.
To earn compound interest, you need to choose the best accounts and investments that offer compound interest. These include high-yield savings accounts, money market accounts, CDs, mutual funds, index funds, ETFs, bonds, and more. Each option has its own features, benefits, drawbacks, and factors to consider.
We hope that this article has helped you understand how to earn compound interest with the best accounts and investments available. If you have any questions or comments, please feel free to leave them below. Thank you for reading and happy compounding!