When you open a savings account it’s for one reason only – to grow your money. Obviously, when you’re comparing savings accounts, you’ll be looking for the higher rates. However, the rate itself isn’t the only thing that you need to look at. There’s the type of interest that the account pays as well. There are two types of interest in the financial world, simple interest and compound interest, and it’s the accounts that use compound interest that you should be aiming for. Do savings accounts pay compound interest? Most savings accounts pay compound interest on their customers’ money because it’s an effective way to grow the money, thereby attracting and retaining customers. Which banks pay compound interest? All Australian banks pay compound interest on some of their products. It’s a case of looking at the product itself rather than the bank if you’re weighing up compound vs simple interest. Compound interest explained It’s not absolutely necessary to deposit more money into the account if you can’t afford it, because your balance will carry on growing as your interest compounds each month. Compounding means that you earn interest on your interest, which is why your earning rate increases over time (as long as you leave the money alone). Simple interest explained Simple interest pays interest only on the principal, or the money that you deposit. So, if you leave $100 in an account or term deposit that pays simple interest at three per cent, you’ll only ever get $3 each year, unless you deposit more yourself. This is how many term deposits work if you are withdrawing the interest as income. More about your interest You need to look at how often it’s calculated, because the more often it’s calculated, the more you’ll earn, because small amounts are constantly being added to your balance to earn interest. It’s also vital to look at how often it’s compounded and paid out, as this also affects how quickly your money will grow. Then, of course, there’s the interest rate itself The bank will always show off its interest rate, because this is how it draws you in as a customer, so it shouldn’t be difficult to find it out. Some accounts will have variable interest rates, so your rate will change with the cash rate. It’s great when rates are higher, but they can also fall; if you’re looking for certainty, a term deposit might be better. Can I make compound interest work even harder? Yes! Put as much money in as you can early on, especially if there’s an introductory rate and avoid too many withdrawals. Deposit what you can, when you can. If you can afford an extra few dollars each week because you’re an expert shopper, then get them in. As soon as the money lands in the account, it’ll start working. Avoid fees whenever possible by linking your transaction and savings account and setting up autopay. You may also face fees if you withdraw a certain amount, so try not to dip in too much. The products compared in this article are chosen from a range of offers available to us and are not representative of all the products available in the market and influenced by a range of factors including interest rates, product costs and commercial and sponsorship arrangements InfoChoice compares financial products from 145 banks, credit unions and other financial institutions in Australia. InfoChoice does not compare every product in the market. Some institutions may have a commercial partnership with InfoChoice. Rates are provided by partners and taken from financial institutions websites. We believe all information to be accurate on the date published. InfoChoice strives to update and keep information as accurate as possible. The information contained on this web site is general in nature and does not take into account your personal situation. Do not interpret the listing order as an endorsement or recommendation from us. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. If you or someone you know is in financial stress, contact the National Debt Helpline on 1800 007 007.