Compound interest can help you build savings over time, though in recent years low interest yields make a conventional bank savings account a poor investment if your goal is income or growth. Mutual and money market funds, certificates of deposit and exchange traded funds have proven much more reliable vehicles for building wealth. That said, money invested in a compounding account will grow over time, and if you can make regular deposits, it will grow faster. The key here is longevity of the investment. If you move money in and out of a savings account, you will diminish its potential. No matter how much money you put into a savings account it will grow at the same rate. You should understand how much interest you will be paid and how often it will compound. Interest rates change over time, and it is wise for you to keep track of them. Even though an account using compound interest will grow much faster than one the relies on a simple interest calculation, if the interest rate is very low, as it typically has been during the past decade, it will be a slow process. The advantage is the deposits in federally insured institutions are insured by the Federal Deposit Insurance Corp., so you can’t lose money like you can with other investments.
No matter how much money you deposit into a savings account, the rate of return is the same even though the return in dollars grows substantially if you deposit more money.Finally, remember the flip side. If you have a debt that uses compound interest, the amount you owe will grow each time the interest compounds and your payments will get larger over time. For that reason, it is wise to pay down compounding debts as quickly as you can.