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.

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 $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? Work with a banker to open a U.S. Bank savings account.