When you put your money into a savings account, it isn't just sitting there. It grows, thanks to interest.
But it’s not just the interest rate that you need to look out for. You also need to pay attention to how often that interest is compounded. (Spoiler: the more frequently it compounds, the better.)
Compounding interest is essentially earning interest on your interest. The interest you earn is added to your balance, so when the interest compounds again, you earn interest on a slightly larger balance.
So, first things first: Interest is the money you can earn on your savings account's balance, expressed as a percentage.
Interest usually compounds daily, monthly, quarterly or annually. The rate at which interest compounds affects how fast your money grows.
How much interest you earn after one year, including all compounding interest, is the APY, or annual percentage yield. When shopping around for a savings account, APY is a good number to use to compare accounts. It gives you a holistic view of how much you could earn on your balance over the course of a year. If you see only the interest rate, you may want to look a little closer to find the APY.
Take a look at how much $10,000 can grow depending on how often the interest compounds.
There are online compounding interest calculators to help you figure it all out.
Just know that the interest rate on savings accounts can change from time to time. Though banks set their own rates, rates also tend to change when the Federal Reserve raises or lowers the federal funds rate.
If you want to learn more, try out our savings calculator to see how much interest you could earn with a Marcus Online Savings Account compared to the national average.