Compounding Interest: Is Your Money Working for You?

Compounding Interest: Is Your Money Working for You?

Given that Bestcashcow.com is a website dedicated to finding the best high yielding banks and their products, I think it is only fitting that I write my first article about compounding interest, its effects, and the overall importance of making sure your money is in a high yielding bank.

Given that Bestcashcow is a website dedicated to finding the best high yielding banks and their products, I think it is only fitting that I write my first article about compounding interest and its effects. Many people, especially financially savvy visitors of this website, have seen banks advertising savings or CD’s with a certain rate, usually called the “Annual Percentage Rate” or APY. Some banks offer a 1.00% APY, others may advertise a 1.50% APY rate, yet the majority of us who see these ads still leave our money in a checking account with our primary bank, yielding next to nothing. I know this because besides hearing stories from others, I’ve done it myself. However, this is absolutely the wrong thing to do.

Even though a 1.00% difference in APY might seem like nothing now, as the chart below shows, it is definitely worthwhile to make sure your bank’s yield is competitive. This table compares a $20,000 deposit put into a 1.00% APY yielding account, against the same balance in a 2.00% APY yielding account. Both accounts have their interest compounded daily, for a period of five years.

                                    Scenario 1 (2.00% APY)           Scenario 2 (1.00% APY)
Deposit amount:                                      $20,000                                       $20,000
APY:                                                             2.00%                                         1.00%
Total interest paid:                                 $2,103.36                                    $1,025.41
Value of account after 5 years:            $22,103.36                                 $21,025.41

The results clearly state the difference: by simply moving your money into an account that has a 1.00% higher yield, you can come out over $1,000 ahead in five years. While some of us have less than 20k to deposit, and others have more, the same rule applies. And although it may seem like a headache to find banks paying the greatest yields, sites like Bestcashcow and its savings chart, allow you to quickly compare banks to find the ones with the highest rates.

By taking the time to compare and move your money to competitive banks, you are increasing your future income by thousands, if not tens of thousands of dollars. Of course, the other major factor of compounding is time, and while we can’t always control untimely emergency expenses that can force us to withdraw our money, a car breaking down perhaps, we can and should control where and at what rate our money is; it would be an injustice not to, and it’s finally about time we make our money work for us.

See BestCashCow's compounding interest calculator here.

Explore the best savings rates here and the best CD rates here.

Reviews

  • IM

    March 18, 2010

    I was actually searching for the highest yielding savings account and came across this page; never heard to this site though.

    Think I'm gonna go with the Ready Saver acct paying 2%, any thoughts?

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