The Best Bank Accounts with Compound Interest

If you’re looking to bulk up your savings, you’ll want to make sure your money is earning a competitive interest rate that compounds regularly. Compounding interest — interest that accrues on top of your balance and any additional interest earned — can help grow your money faster.

With prices and inflation still up, earning a little bit extra on every dollar can help. But not every bank account is a compound interest account. Here’s everything you need to know about compound interest, the best compound interest accounts, and more.

What is compound interest?

Compound interest is the money you earn on a starting balance, or principal, and interest earned over time. Simple interest, by comparison, only earns interest on your principal and not additional interest earned. When your money is in a bank account where your interest compounds, you can grow your money faster than you can with simple interest.

How does compound interest work?

Do you ever wonder how interest works on savings accounts? The more often your bank compounds your interest, the more you’ll earn. Savings accounts that compound daily are more lucrative than those that compound yearly.

For example, let’s say you open a GIC with $1,000 and lock in a 6% interest rate. If your interest compounds monthly, then in month two, you’ll earn interest on your principal ($1,000) and any interest you earned in month one. Compound interest can help you earn more money on your investments, faster.

What are compound interest accounts?

Compound interest accounts are any bank, financial institution, or investment accounts that let you earn compound interest. Some of the most common compound interest accounts are savings accounts, but there are others to explore. We’ll walk you through some of the best compound interest accounts below.

1. High-yield savings account

A high-yield savings account is a deposit account that can help you earn compound interest well over the average savings rate — sometimes ten times as much. Interest rates on financing options, like credit cards and loans, are high right now since the Bank of Canada has raised its central rate to help curb inflation. But that also means savings interest rates are high, giving you a better chance to earn extra money on your funds.

High-yield savings accounts, or HYSAs, earn variable interest rates. That means the rate you earn when you first open the account can go up or down depending on economic factors or the bank’s preference. Although your savings rate can decrease over time in a high-yield savings account, it’s a good place to save money for short-term savings goals like an emergency fund or money earmarked for a vacation.

Many of the best high-yield savings accounts in Canada offer over 5% annual percentage yield (APY) on your money. You can find interest rates over 5% on select accounts at banks like CIBC and Tangerine. Some combined savings and spending accounts, like KOHO, also offer up to 5% back on your money.

2. Traditional savings account

Not all savings accounts earn interest as high as HYSAs. A traditional savings account can typically be found at brick-and-mortar financial institutions in Canada and may earn as little as 0.01%. This type of secure compound interest account might earn between 1% or 2%. Regardless of the rate, your interest still compounds, helping you earn a little bit extra on your cash.

You’ll certainly earn more by moving your savings to a high-yielding account, but there are other reasons why you might opt for a traditional savings option. If you need access to cash, a traditional account at a financial institution with physical branches may be easier to access. And if you’re opening a joint account with a spouse or child, in-person service might also come in handy.

Just watch out for monthly fees and minimum monthly balance requirements — if your savings account costs more to maintain each month than you earn in interest, it might be better to switch to a different savings option.

3. Registered savings accounts

Another type of compound interest account in Canada is a registered savings account, which you might use to help you save for retirement or even short-term goals. There are two types of registered savings accounts available: tax-free savings accounts (TFSAs) and registered retirement savings plans (RRSPs).

Both options are types of investing accounts, which means you can earn compound interest depending on market conditions. Investment accounts often earn more long-term than savings, but they are riskier.

You should talk to a financial advisor or retirement planner before opening a registered savings account to ensure you know the risks and are investing in a portfolio that best aligns with your short- or long-term savings goals.

4. Guaranteed investment certificate (GIC)

Similar to a certificate of deposit in the US, a guaranteed investment certificate, or GIC, lets you lock in a set interest rate in exchange for leaving your funds in the bank for a certain period of time. This compound interest account is offered for different terms, typically ranging from one month to ten years. When you open a GIC, you’ll earn that interest rate for the entirety of the certificate’s term — unless you withdraw your funds early. Some banks also refer to GICs as term deposits.

The compound interest you earn on your GIC might be paid out monthly, quarterly, or annually. When your term ends, the bank will release your principal balance, along with any interest you’ve earned.

A GIC may make sense if you have money set aside for a specific goal you won’t need immediately. For instance, if you want to buy a new car in three years, opening a three-year GIC can help you earn a guaranteed return on your investment. You can also choose to reinvest your funds in a new GIC once your term expires.

Unlike savings accounts, you won’t have to worry about your interest rate ever dropping when you open a GIC. However, a GIC isn’t the best option for money you want to access regularly since you agree to keep your savings with the bank or financial institution for a set period of time.

5. Chequing account

While less common, some chequing accounts in Canada are also compound interest accounts that let you earn money on your deposits. Typically, you’ll earn much less than you would with a savings account — think near 0.01%, but it can help you build up a little extra money.

Chequing accounts in Canada come with more flexibility than some savings options, giving you easier access to your money through debit cards and cheques. If you want to maximize your compound interest, link your chequing account to your savings so you can easily transfer money to the higher interest-earning account.

6. Mutual fund

Another type of investment account, a mutual fund is a compound interest account that's best for longer-term goals like building a nest egg or retirement fund. A mutual fund lets you invest in different types of investments, like stocks or bonds, to help grow your money over time.

Different types of mutual funds depend on your financial goals and risk preference. The younger you are when you begin investing, the more your money can grow over time, thanks to compound interest.

Like registered savings accounts, you should talk to a financial professional before opening a mutual fund to ensure your specific account type aligns with your money goals, timeframe, and risk aversion.

How to calculate compound interest

When you have an account that earns compound interest, you can earn interest on both your original balance, any new money deposited, and any previous interest earned. To calculate how much you can earn with compound interest, you’ll need to know your interest rate and how often your bank compounds your interest.

Once you have this information, you can use an online interest compounding calculator to estimate your earnings. Or, you can use the compound interest formula.

The formula for calculating compound interest

To calculate how much you can earn in compound interest, plug in your amounts to the formula below:

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

• A = final amount

• P = principle (initial deposit)

• r = interest rate (decimal form)

• n = how many times the interest is compounded in a given time period

• t = time frame

For example, let’s say you deposit $1,000 in a high interest savings account ‘that earns 5% annual interest rate for one year. If your bank compounds your interest monthly, you will have earned $51.16 in interest at the end of the year. But, if your bank compounds interest quarterly, you would earn slightly less, bringing home only $50 in interest earnings.

That’s why it’s a good idea to look for a high-interest rate and a bank that compounds interest more frequently.

How to earn compound interest

You can earn compound interest on a deposit or savings you build over time by opening a bank account that earns interest.

There are several different types of accounts that accrue compound interest, but some of the most popular options include:

• High-yield savings accounts

• Traditional savings accounts

• Registered savings accounts

• Guaranteed investment certificates (GITs)

• Interest-earning chequing accounts

• Retirement investment options

• Mutual funds and other stock investing options

• Bonds

Finding the right compound interest-earning account will depend on your financial goals. If you need easy access to your money, a high-yield savings account, traditional savings account, or chequing account may be a good fit. If you want to earn a guaranteed interest rate on your money and don’t need it for a specific period of time, a GIT offers a secure way to earn a fixed interest rate on your savings. And, if you can incur even more risk and don’t need your money for years or decades, investing can help you earn the biggest return on your deposit.

It’s generally a good idea to spread your savings out across multiple interest-earning accounts. You’ll want to keep an emergency fund easily accessible in a savings account but may want to invest money for a future down payment in a GIT. Your retirement and other long-term goals will also fare better in an investment account. If you want to expand your portfolio, you might invest in the real estate market or stock market.

How to get the best compound interest rate on your money

Right now savings account interest rates in Canada are relatively high, and you can earn over 4% on your money. However, not all banks or credit unions offer competitive rates on all interest-earning accounts. To make sure you’re earning the most money, be sure to shop around and look for the type of savings option that aligns with your financial plans.

Although savings rates are high now, interest rates will likely begin to decline at some point in 2024, so earning a higher interest rate sooner in the year can help you grow your money even faster.

How much interest can I earn in a compound interest account?

The compound interest you accrue in a bank account won’t help you get rich overnight, but it can help you pad your savings and earn a little extra back on your deposit. While there’s no limit to the amount of compound interest you can earn, most banks in Canada insure your deposit for up to $100,000 per account. Depositing more than this could mean losing some of your money if the bank fails. To be safe, try to keep your balances in individual savings accounts under this threshold.

Investment accounts offer more opportunities to earn even more with compound interest over a longer period of time. However, these accounts do not guarantee a return; you could lose money depending on the economy. Before opening up an investment account, talk to a financial advisor to ensure it matches your risk tolerance and long-term financial goals.

What are compound interest investments?

Investments also earn compound interest. These types of accounts can be opened at investment firms and brokerages. Compound interest-earning investments include mutual funds, stocks, bonds and other market-based accounts.

You can generally earn a higher rate of return by investing in the stock market than you can with a high-yield savings account. While you might earn 4% from your bank's savings account, you could earn between 6% to 7.5% with an investing account. However, these accounts typically work best for longer-term goals that are decades in the future.

You can also open a brokerage account or invest in funds that are spread across multiple accounts to spread out your risk across the stock market and diversify your portfolio.

Some common investment accounts that earn compound interest include:

• Individual stocks

• Exchange-traded funds (ETFs)

• Index funds

• Mutual funds

• Bonds and corporate bonds

• Securities

• Index-linked deposits

What are the best compound interest accounts?

The best interest-earning account for you will depend on your specific financial situation. However, some expert guidance can help you figure out the top bank and investment accounts to set up.

A savings account is the lynchpin of any financial plan. It lets you set aside money for short-term goals and is easy to access in case an emergency expense pops up. If you don’t have a savings account, open a high-yield account to earn an even better return on your money.

Setting up and regularly contributing to a retirement account that lets you earn compound interest, like a registered savings account, is also important for your future finances. The earlier you open a retirement account, the more time your interest will compound. That means your savings will have more time to grow.

Other compound interest accounts can be beneficial once you’ve taken care of the first two savings goals. You might want to open a guaranteed investment certificate to earn a fixed interest rate on money earmarked for a goal in the future, for example. Or, you might decide to open an investing account to further diversify your earnings.

How to open a compound interest account

Opening an account that earns compound interest is similar to opening any bank account in Canada. Depending on the bank, You can do this online or in person, and it requires just a few minutes and some brief personal and financial information.

To open a saving account, follow these steps:

1. Provide two valid forms of ID. In Canada, you’ll need one form of identification that confirms your legal name and address and another confirming your name and date of birth. This could be your provincial driver's license and a recent bill. You can also use your passport or another existing bank statement as one of your forms of ID.

2. Submit your Social Insurance Number (SIN). Not all bank accounts in Canada require you to submit your SIN, but interest-bearing accounts do.

3. Fund your new account. Depending on the account, you may need to make a minimum deposit when you open your account. If not, you may still want to fund your account to kick off the process.

Set up a secure online password to access digital banking and install the bank’s app on your phone for mobile banking access. Some banks may provide you with bank cards (if eligible) when you open your account, but you may need to wait for them to arrive in the mail.

Grow your money and build your credit with KOHO

If you want to earn interest and build your credit, KOHO might be a good fit for your savings. You’ll get access to your free credit score, as well as a virtual credit card that makes online shopping easy and convenient. KOHO’s high interest savings account lets you earn up to 5% on your savings and 5% cash back on eligible purchases, all for a low monthly fee. You’ll also get overdraft protection, so you don’t have to worry about overdrawing on your account.