How compound interest works

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

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.

What is simple interest?

Simple interest is money you earn on the original amount in your account — sometimes called the “principle.”

Here's how the math works to calculate simple interest: 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.

What is compound interest?

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 $20 interest in year 1, and $20.40 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? Make an appointment today to open a U.S. Bank savings account.