Today’s savings accounts do not offer interest rates much higher than 1%. How does this impact the power of compounding?
There will not be a lot of money in interest.
Today’s savings accounts do not offer interest rates much higher than 1%. How does this impact the power of compounding?
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Low interest rates, like those around 1% in savings accounts, significantly reduce the power of compounding. Compounding relies on earning interest on both the initial amount and the accumulated interest over time. When interest rates are low, the amount of interest earned is minimal, meaning that the growth of savings is slow. As a result, the benefits of compounding—earning more on previously earned interest—are diminished, leading to less overall growth of the investment.