Compound interest is interest calculated on both your original deposit and any interest you've already earned. The result is that your savings grow faster over time, because each new interest payment is based on a larger balance than the one before it.

It's sometimes described as "interest on interest", and that's exactly what it is. The longer you save, the more powerful the effect becomes.

How compound interest works

Here's a simple example. Say you deposit €1,000 in a Savings Account with an annual interest rate of 2%.

After year one, you earn €20 in interest. Your balance is now €1,020.

In year two, you earn interest on €1,020, not just the original €1,000. That gives you €20.40, bringing your balance to €1,040.40.

The extra €0.40 might not sound significant. But over 10, 20, or 30 years, with higher balances or more frequent compounding, the difference between simple interest and compound interest becomes substantial. Starting early gives compound interest more time to work, which is why saving consistently from a young age tends to produce outsized results.

The key variables are: the interest rate, how often interest is compounded (daily, monthly, or annually), and how long you leave your money to grow. The more frequently interest compounds, the faster your balance builds.

Where compound interest applies

Compound interest works in your favor when you're saving. It works against you when you're borrowing. Credit cards, loans, and overdrafts often use compound interest too, which is why unpaid balances can grow quickly if left unchecked.

For savings, the most common accounts that benefit from compound interest are regular and high-interest savings accounts, as well as certain investment products. The impact is most noticeable over long time horizons, which is why starting early and saving consistently matters more than starting large.

Make your savings grow with bunq

With a bunq Savings Account, you earn interest on your balance automatically. You can open multiple Savings Accounts for different goals, keeping your money organized and always earning.

Auto Round Up adds small amounts to your savings every time you spend, amounts that compound over time. And bunq's Budgeting tools help you track your spending so you can consistently find room to save more.

If you want a guaranteed rate locked in for a fixed period, a Term Deposit lets compound interest work for you without any worry about rate changes along the way.