How Compound Interest Works

When you save money, you probably think of it as adding up with each deposit, a little bit at a time. But sometimes, one plus one can equal more than two—thanks to a powerful force called compound interest. Here's how it works.

Video Transcript:

When you save money, you probably think of it as adding up with each deposit, a little bit at a time.

But sometimes, one plus one can equal more than two - thanks to a powerful force called Compound Interest—Here's how it works.

Interest is the money that a bank pays you on your deposit. You can see how much interest you’re earn by looking at your account's APY, or annual percentage yield. If you have a one percent APY, for instance, then you earn one dollar on every hundred dollars you keep in that account, each year. 

Compound interest is the interest you earn on the interest you earn on your money. So, for every hundred dollars you deposit at one percent, you'll earn that interest on one hundred and one dollars after the first year, and so on, and so on.

That’s why the effects of compound interest only get more impressive over time, especially over longer periods, and with higher-interest accounts, like Certificates of Deposit. 

One way to think of compound interest is like a snowball. The more the snowball rolls, the bigger it gets, the more snow it adds as it rolls.

In this analogy, the speed of the snowball is also a factor. The more often the interest is compounded in your account – say daily, rather than annually -  the faster your money will grow.

It’s one very important way that a small deposit can end up—over time, and with a high APY—a substantial nest egg.

And that's how compound interest works—for you. 

Learn more about Synchrony Bank high yield savings accounts and cds.