Today's savings accounts generally offer interest rates that are only modestly higher than around 4% to 5%, with some high-yield accounts reaching up to about 4.66% APY and regular savings accounts up to about 7.5% in some cases
. However, these rates are still relatively low compared to historical highs.
Impact on the Power of Compounding
- Lower interest rates reduce the growth rate of savings: Since compound interest grows your savings by earning interest on both the principal and the accumulated interest, a lower interest rate means the amount earned each compounding period is smaller, slowing the overall growth of the investment
- Compounding frequency helps but can't fully offset low rates: Even if interest is compounded daily or monthly, the benefit of compounding is limited by the base interest rate. For example, a 1% interest rate compounded daily grows your investment more than simple interest but still results in relatively modest gains over time
- Long-term wealth accumulation is slower: With today's moderate savings rates, it takes longer for savings to grow significantly through compounding alone, especially if contributions are small or infrequent
- Inflation considerations: If the interest rate on savings accounts is close to or below inflation, the real value of savings may not grow much, which diminishes the effective power of compounding in preserving and increasing purchasing power
In summary, while compounding still works with today's savings account interest rates, the relatively low rates mean that the growth of savings through compounding is slower and less powerful than it would be with higher rates. Savers may need to contribute more frequently or consider alternative investment options to achieve stronger growth over time.
