I’ve found the lazy secret to doubling my savings in 12 months

Nearly a year ago, I moved $1,000 into a high-yield savings account and set up regular automatic transfers from my checking account. My goal was to double my savings before the end of 2024 without having to budget or make any major sacrifices.

Today I can proudly announce that I have achieved my goal. The magic of compound interest has helped me a lot.

Compound interest can be both good and bad. When you save money with a savings account, compound interest is on your side, accelerating the growth of your dollars. However, if you borrow money or have debt, such as with a high-interest credit card, compound interest works against you.

Understanding compound interest can help us make better decisions about how to save and spend money. Even though the Federal Reserve is starting to lower interest rates, it’s still a good time for savers to take advantage of automating deposits into a high-yield savings account. This is how I doubled my savings in just one year, without lifting a finger.

What is compound interest?

Let’s get our definitions straight first. Albert Einstein famously called compound interest “the eighth wonder of the world.” Anyone who understands compound interest deserves it. Anyone who doesn’t understand compound interest pays it.

When you put money into an account that earns compound interest, you don’t just earn interest on your initial deposit amount (also called the principal). Your interest also earns interest, which grows your account balance. Simple interest, on the other hand, only applies to the principal amount.

In other words, compound interest is a powerful and simple way to increase the value of your savings. But you do need the right savings account, money market account or investment instrument, such as a certificate of deposit.

Read more: How savings interest works

Why choose a high-yield savings account?

Putting money in a high-yield savings account is a low-risk way to take advantage of compound interest and maximize the growth potential of your returns.

Look for the percentage associated with the APY, or the annualized yield. The best high-yield savings accounts currently earn APYs as high as 5.25%, more than ten times what national average of the interest on savings accounts, namely 0.45%.

Suppose you deposit €1,000 into a high-yield account, which yields a 5% annual return, and compound the interest daily: you would end up with a balance of around €1,051 in one year, without having to make any additional contributions doing. Assuming the same 5% APY is applied to your new balance, you would have $1,105 after the second year. And so on.

The higher the balance on an account, the more you earn in interest. Suppose you deposit $10,000 into the same high-yield account with a daily interest rate increase of 5%. After a year you will have approximately $10,513. That amounts to almost $43 extra money per month toward your savings goal.

The beginning of my savings journey

Last December I opened a high-yield savings account with Ally, which had an APY of 4.35% at the time. Today, Ally’s HYSA earns an APY of 4.00%. Compare that to my previous savings account at my local credit union, which yielded a paltry 0.01% APY.

As a general rule, online-only banks consistently offer better APYs on savings accounts because they have lower overhead costs than banks with physical branches.

Here’s what the interest looks like after one year for each account, based solely on an initial deposit of $1,000:

That’s an extra $40 just for parking savings on a higher yield account. However, keep in mind that savings accounts earn a variable interest rate, meaning the APY can change at any time. Variable interest rates can be unpredictable, but interest rates on high-yield savings accounts are expected to remain high for some time to come.

How to double your savings in one year

Small steps are still steps in the right direction. You don’t need to set aside $100,000 to make noticeable gains from your savings. Here’s what you need to do.

🏦 Deposit €1,000 (or another amount) into a savings account with a high return

Start by depositing $1,000 or an appropriate amount into a high-yield savings account that earns 4% to 5% APY. Ally’s high-yield savings account currently earns 4.00% APY, but savings accounts can be found with interest rates as high as 5.25% APY. Make sure your initial deposit is a comfortable amount that you can put aside for at least a year without having to withdraw it for everyday expenses.

💸 Set up automatic transfers of €25 per week

Set up automatic recurring transfers to transfer money to your savings account on a weekly, monthly or quarterly schedule that suits your finances. Automating your contributions is a way to “set it and forget it.” You’ll never have to manually fund your account again and your savings will still grow consistently.

In my case, I set up a recurring automatic transfer of $100 from my checking account to my Ally savings account every month, which works out to $25 per week. That was a reasonable amount based on my income, debts and expenses, but the exact amount you set aside depends on your budget.

👀 Watch your balance double

Since interest rates are variable and likely to fall now that the Fed has made two rate cuts, keep an eye on your contributions and adjust your projections when the time comes. Fortunately, savings rates will not drop overnight.

In my case, the APY on my Ally account has dropped from 4.35% to 4.00% in the past year. Because the change in APY was minimal, I didn’t have to change my savings approach to reach my goal.

After a year, my $1,000 turned into about $2,265. Not too shabby.

What is the difference between daily and monthly interest accrual?

How often your interest compounding determines how quickly your principal balance grows. Banks and credit unions can compound interest rates annually, monthly or daily. On most high-yield savings accounts, interest is compounded daily and paid out monthly.

Although daily compounded interest can give you a greater return than monthly or annually compounded interest, the difference is not substantial. To grow your savings, the most important factors are the APY and the length of time you save.

Let’s take a look at how daily versus monthly interest rates can affect your savings:

Is there a downside to earning compound interest?

When compound interest applies to your savings income, you can gain more value over time, although you should always consider APY and the length of time you invest. If the APY on your account is well below 1%, compound interest will only be a few cents extra.

Keep in mind that any interest you earn on a savings account is considered taxable income by the IRS. When tax season rolls around, you’ll need to include the interest you earned for the filing year on your federal tax return.

If you want to significantly increase your wealth, this savings strategy may be too “G-rated” for you. Investing your money in the stock market can give you greater returns in the long run, but you need to evaluate your risk tolerance.

The bottom line

I’ve been pretty vocal about my journey of paying off student loan debt and learning new ways to save while juggling debt. It’s all about finding the right balance for your financial situation.

While high interest rates mean it’s not a good time to borrow, it’s still a good time to be a saver. Take advantage of the power of compound interest while savings account APYs are high. The sooner you do this, the more interest you will receive.

Einstein was right.