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Compound Interest

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A calculator and pencils sit on light blue desktop. Text, Understanding compound interest.

Compound interest is a powerful tool for growing savings and investments.

Desktop scrolls to reveal notepad, stapler, paper clips, scissors, tape. Text, Here's how it works.

There are two basic types of interest: simple and compound.

Hand uses calculator. Text, Simple interest builds on the principal.

Say you deposit $10,000 and earn 2% simple interest annually. Each year, you'll earn $200 interest.

Hand adds two stacks of hundred dollar bills. Text, With compound interest, you earn a larger amount of interest each year.

That's because compound interest builds on the principal balance plus accrued interest. Bar graph and passbooks added to desktop.

Text, If you deposit $10,000 at a 2% interest rate compounded annually, you'll earn $200 interest in year 1, and $204 interest in year 2. Hand adds stacks of hundred dollar bills.

Text, The longer you let your money grow, the faster it will grow. Ledger with calculations on desktop. Hand adds more hundred dollar bills.

Text, U.S. Bank. U.S. Bank dot com, slash financial I-Q

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Copyright 2019, U.S. Bank National Association. Member F-D-I-C. 

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How compound interest works

Want your money to work harder for you? Take time to understand the growing power of how compound interest works.

Tags: Interest rate, Investing, Investments, Savings
Published: January 20, 2021

You’ve probably heard of “compound interest,” but you might not know the ins and outs of how compound interest works. Here’s what you need to know in order to take advantage of compound interest as you save money.

 

Simple interest example: Simple interest is money you earn on the original amount in your account — sometimes called the “principle.” So, if you have $1,000 in your savings account and the interest rate is 2% annually, you’d accrue $20 of simple interest in a year.

 

Compound interest example: Compound interest builds on the principal balance plus accrued interest. If you have $1,000 at a 2% interest rate compounded annually, you'll earn $200 interest in year 1, and $204 interest in year 2 since you have $1,020 in your account after the first year.

 

Want to become more savvy with savings beyond understanding how compound interest works? Work with a banker to open a U.S. Bank savings account.