Answer:
In the simplest of words, $1,000 at 1% interest per year would yield $1,010 at the end of the year. But that is simple interest, paid only on the principal. Money in savings accounts will earn compound interest, where the interest is calculated based on the principal and all accumulated interest.
Benjamin Franklin provided an example of the power of compounding—dubbed snowballing—where $4,500 left to each of two American cities outperformed the rate of inflation over 200 years.
So in the case of savings accounts, interest is compounded, either daily, monthly, or quarterly, and you earn interest on the interest earned up to that point. The more frequently interest is added to your balance, the faster your savings will grow. So with daily compounding, every day the amount that earns interest grows by another 1/365th of 1%. At the end of the year, the deposit has grown to $1,010.05.
Explanation:
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