Accounts With Compound Interest: How to Find the Best One

The good news is that almost every savings account already pays compound interest. High-yield savings accounts, money market accounts, CDs and credit union savings all add the interest you earn to your balance, then pay interest on that bigger balance the next time around.

So the real question isn't which accounts compound. It's which one pays you the most, charges you nothing, and lets you reach your money when you need it. This guide covers the accounts that compound, how to compare them, and why the compounding schedule matters much less than banks make it sound.

The short answer

Compare accounts by APY, the annual percentage yield. The APY already includes the effect of compounding, so a 4.00% APY that compounds daily and a 4.00% APY that compounds monthly pay you the same over a year. Once the APYs are close, decide on fees, insurance and how quickly you can move money out.

Accounts that pay compound interest

Account	How often interest usually compounds	Getting your money out	Protection
High-yield savings account	Daily or monthly	Transfer any time, usually within one to three business days	FDIC or NCUA insured
Money market account	Daily or monthly	Checks or a debit card at some banks, often with a minimum balance	FDIC or NCUA insured
Certificate of deposit (CD)	Daily or monthly	Locked until it matures, with a penalty for cashing out early	FDIC or NCUA insured
Credit union savings	Daily, monthly or quarterly	Like a savings account, but you have to qualify to join	NCUA insured
I bonds	Every six months	Locked for the first year, and you give up three months of interest if you cash out within five years	Backed by the US Treasury

High-yield savings accounts

This is the right home for most people's emergency fund and short-term savings. Online banks usually pay well above the rates at big branch banks because they don't pay for branches. Online banks such as Marcus by Goldman Sachs, which I've used for my own emergency fund, let you open an account in minutes and move money to your checking account whenever you need it.

Money market accounts

A money market account works like a savings account, and some come with checks or a debit card. The catch is usually a minimum balance. Drop below it and you may earn a lower rate or pay a monthly fee, so make sure you can keep the minimum in the account.

Certificates of deposit

A CD locks in a rate for a set term, from a few months to five years or more, and charges a penalty if you pull the money out early. That makes CDs useful for money with a date attached, like a down payment you'll need in two years. To keep some cash within reach, you can build a CD ladder: split your money across CDs that mature at different times. More in our guide on how to invest in CDs.

Credit unions

Credit unions are owned by their members and often pay good rates on savings. To join, you usually need a connection such as where you live, where you work, or a group you belong to. Credit union deposits are insured by the NCUA, which works like FDIC insurance at a bank.

I bonds

I bonds are savings bonds from the US Treasury with a rate tied to inflation. Interest compounds every six months, and you buy them at TreasuryDirect. You can't cash them in during the first year, and cashing out before five years costs you the last three months of interest. See what I bonds are paying now.

Beyond savings accounts

Money you won't need for many years can compound faster in investments, through dividends that you reinvest and growth in a diversified fund. Unlike a savings account, an investment's value can fall, so this is for long-term money, not your emergency fund. If you're working out how much to put there, see how much to invest each month.

Daily vs monthly compounding: does it matter?

Barely. Here is $10,000 left alone for one year at a 4% interest rate:

Compounding	Balance after one year
Daily	$10,408.08
Monthly	$10,407.42
Yearly	$10,400.00

Daily beats monthly by 66 cents. That's why the APY is the number to compare: it folds the compounding schedule into a single figure. A 4% rate compounded daily works out to about a 4.08% APY, and compounded monthly to about 4.07%.

The rate itself matters far more. Put in $10,000 and add $200 a month for 10 years, compounded monthly:

At 4%, you end with $44,358. You put in $34,000 and earned $10,358 in interest.
At 4.5%, you end with $45,910. That's $1,551 more, from half a percentage point.

These are example rates, not current offers. Run this example in our compound interest calculator and change any number to see your own.

How to compare accounts

APY. Compare the APY, not the interest rate. Check whether it's an introductory rate that drops after a few months, and whether you need a minimum balance to earn it.
Fees. A $5 monthly fee on a $2,000 balance wipes out most of the interest you'd earn. Plenty of online banks charge no monthly fees at all.
Insurance. Make sure the bank is FDIC insured or the credit union is NCUA insured. Coverage is $250,000 per depositor, per institution, per ownership category. The FDIC explains how deposit insurance works.
Access. How long does a transfer to your checking account take? Can you reach the money on a weekend if something goes wrong?
Today's rates. Savings rates move with the Federal Reserve, so any list of the best rates goes stale fast. Check each bank's current APY on its own site, and compare it with the national average savings rate the FDIC publishes every month to see how far above average an offer really is.

How compound interest works

Compound interest is interest earned on interest. With simple interest, $1,000 at 1% earns $10 every year, because the rate only ever applies to your original $1,000. With compound interest, the $10 you earn in year one joins your balance, so in year two you earn 1% of $1,010, and so on. The gap starts small and widens every year.

The formula is:

A = P(1 + r/n)^(nt)

A is what you end up with.
P is the amount you start with.
r is the annual interest rate, written as a decimal (4% is 0.04).
n is how many times a year interest compounds (12 for monthly).
t is the number of years.

For example, $1,000 at 5% compounded monthly for 10 years grows to about $1,647. With simple interest, the same deposit would reach $1,500.

Common questions

Which banks offer daily compound interest?

Many online banks and credit unions compound savings interest daily, and the account's rate disclosure will say so. As the table above shows, daily compounding adds only cents a year over monthly, so treat it as a tiebreaker, not a reason to switch banks.

Is compound interest taxed?

Yes. Interest from savings accounts, money market accounts and CDs counts as ordinary income in the year it's credited to your account, even if you never withdraw it. Your bank sends a Form 1099-INT if you earn $10 or more. I bonds are an exception: you can wait to pay federal tax until you cash them in, and they're exempt from state and local income tax.

Are high-yield savings accounts safe?

Yes, as long as the bank is FDIC insured or the credit union is NCUA insured and you stay within the $250,000 coverage limit. Your balance can't lose value the way an investment can. The bigger risk is quieter: a rate that falls behind inflation.

The bottom line

Don't chase daily compounding. Pick an insured account with a competitive APY, no monthly fees, and access that fits what the money is for. Keep your emergency fund and short-term savings there, and invest money you won't need for years where it can compound faster.

Related reading: Compound Interest Calculator Monthly Explained

Related reading: How Much Money Should I Save Each Month?