Spent a lot lately? Save more with compound interest

Image: Getty
Image: Getty

People who know about saving money swear by compound interest. They love to call it the 'power' of compound interest. 

But it's not an instant power, more of a slow burn. Simply, the longer you park your money in a good savings account, the more interest you earn on top of that initial deposit. This is why ASIC’s Moneysmart advises savers to start as soon as they can to start building their money up - smart saving is about acting now in preparation for the future. 

Let's take a look at how compound interest works then. 

How to save money, smartly 

The idea with compound interest is that you earn interest on interest. For example, let's say you started with $1,000 in your savings account and added $200 per month over 5 years at 5% p.a. interest. After just 20 months, your balance would have jumped to $5,249. 

This can be broken down as follows: $1,000 initial deposit + $4,000 ($200 x 20 months) + $249 interest = $5,249.

After 5 years or 60 months, the breakdown would be as follows: $1,000 +  $12,000 ($200 x 60) + $1,885 interest = $14,885. 

You can see that by waiting for the interest to be applied each month for many months, your initial money can truly grow to something substantial! (Try these sums yourself on our savings calculator).

Looking for a better savings rate

Now just for kicks, imagine you found a slightly better interest rate, such as the AMP Saver Account which is currently at 5.20% (if conditions are met) or the ME HomeME Savings Account which offers 5.55% (if conditions are met). The compound interest with even a slightly higher rate is noticeably better. 

Let's make it 5.50%, for our example: 

That initial $1,000 would grow to $15,092, if you were to deposit $200 each month over 5 years. The amount of interest earned over this period would be $2,092!

This is why people refer to it as a power - the result of incremental increases can be stunning. Remember, this is unlike simple interest, which is calculated based on your principal amount only. Instead, compound interest calculates the interest on your principal amount plus the interest paid each month. As mentioned, it’s interest on interest!

This is why it's best to stash your money now and leave it for a while, so that the compounding effect can take hold. If you do this, you perpetually increase the interest you earn (provided you’re applying the same interest rate or better). 

And finally, it’s worth noting that interest is usually calculated on your balance daily then paid into your account each month.

Right now, with some savings account research, you can still find some rates at 5% or higher, which isn't too bad in the context of the last 10 years. It’s worth comparing a few different savings accounts, and you can start by checking out some of the top savers below. 

Compare top savings accounts on Mozo

Mozo may receive payment if you click the products below. We don’t compare the entire market, but you can search our database of 274 savings accounts.
Last updated 21 July 2024 Important disclosures
  • Savings Account

    5.35% p.a. (for $0 to $250,000)

    4.75% p.a.(for $0 to $1,000,000)

    Yes up to $250,000

    Bonus variable rate is available for the first 4 months.

    Competitive introductory variable rate for first 4 months (on deposits up to $250,000). No account keeping fees to pay. Multiple 2024 Mozo Experts Choice Award winner.

    Compare
    Details
  • Reward Saver Account

    5.25% p.a. (for $0 to $1,000,000)

    0% p.a.(for $0 and over)

    Yes up to $250,000

    Intro bonus rate of 5.25% for balances up to $1,000,000 for the first 4 months, reverting to 3.25%. Minimum deposit of $50 and no withdrawals.

    Introductory bonus rate for balances up to $1,000,000 for the first 4 months. Minimum deposit of $50 and no withdrawals. Start your account online in under 10 minutes and earn interest on balances up to $1,000,000 (T&Cs apply). No monthly account fees, helping you save smarter and faster.

    Compare
    Details
  • Bonus Saver Account

    5.00% p.a. (for $0 to $250,000)

    0.05% p.a.(for $0 and over)

    Yes up to $250,000

    Bonus rate when at least $20 is deposited each month and five Visa Debit transactions are made each month using linked Glide transaction account.

    Start saving and earn interest with just a $20 deposit and make 5 eligible transactions each month. No fees or penalties for withdrawing money.

    Compare
    Details
  • Savings+Bonus

    5.00% p.a. (for $0 to $250,000)

    2.00% p.a.(for $0 to $250,000)

    Yes up to $250,000

    Minimum $100 monthly deposit and no withdrawals to earn bonus interest each month.

    Earn a generous interest rate on your at-call savings (T&Cs apply). Interest is calculated daily and paid to you monthly. A $5 monthly membership fee will not apply if your total account balances with First Option Bank exceed $1,000 or you have a credit card or loan with the bank.

    Compare
    Details
  • Mozo Expert Choice Badge
    Savings Maximiser

    5.50% p.a. (for $0 to $100,000)

    0.55% p.a.(for $0 and over)

    Yes up to $250,000

    For customers who have an Orange Everyday account, deposit $1000 into a personal ING account, make 5 eligible transactions and grow their nominated Savings Maximiser account each month.

    Great variable rate every month when you grow your balance each month in addition to other eligibility criteria. No ING fees to pay. Save even more with ING Everyday Round Up. Mozo Experts Choice Awards Everyday & Savings Bank of the Year winner for 2024.^

    Compare
    Details