9 Best Compound Interest Investments

You work hard for your money, and it’s only right for your money to return the favor! Leveraging the best compound interest investments is essentially a way for your money to make money. These investments are widely recognized as one of the most powerful tools for growing money over the long term. 

Best compound interest investments

There’s even a popular quote that says: “Compound interest is the eighth wonder of the world.” It’s often attributed to Albert Einstein, but the fact-checking jury is out on whether that’s accurate.

Either way, if you don’t have time for a trip to Machu Picchu or the Great Wall of China, the wonder of compound interest can change your life no matter where you are!

With the right strategy and a mix of the best compound interest investments, you can take advantage of the power of compound interest and maximize your returns. Let’s learn about how it works and nine of the best investments for compound interest!

9 Best compound interest investments

If you’re looking for ways to start growing your money, this list is a great place to start! Here are nine of the best compound interest investments and how to start leveraging them. 

1. High-interest savings accounts

High-interest (also called high-yield) savings accounts offer one of the safest, easiest, and best investments for compound interest. In my opinion, everyone should have one!

Many traditional savings accounts barely pay any interest. If you look up the savings account interest rates at most brick-and-mortar bank chains, you might find numbers that are awfully close to zero…like 0.01% APY. Interest that low won’t compound very fast.

High-interest savings accounts, meanwhile, can offer yields that are exponentially higher than the national average. Normally, you’ll find these accounts at online banks or local institutions rather than nationwide chain banks. Since online banks have lower overhead expenses than their brick-and-mortar counterparts, they can invest more money into paying high yields to customers. 

Even better? Many of these banks offer daily compounding on the interest you earn. That means every single day, the interest you earned yesterday is calculated as part of your balance.

Then, that interest will immediately start earning interest too! All interest you accrue will usually be paid as a lump sum at the end of each month. 

How to invest in a high-interest savings account

You can find high-yield savings accounts at many different banks and credit unions. Consult Investopedia’s list here to see which savings accounts currently offer the highest yield. Be sure to also read up on the terms and possible fees for each one. 

2. Certificates of deposit (CDs)

If you have savings that you aren’t going to need in the immediate future, consider investing in CDs! Not the music kind, though—the “certificate of deposit” kind.

So, what is a certificate of deposit? CDs are essentially fixed-term, fixed-rate investments that require the investor to deposit a certain amount of money into the CD for a specified period of time. That could range anywhere from a few months to 5+ years.

Usually, the longer the term, the higher the interest rate will be. When the CD matures, the investor can either cash it out or reinvest the funds in another one.

Generally, CDs offer higher interest rates than savings accounts (but not always—make sure to compare your options). They usually also pay compound interest; you’ll have to check the individual terms to see how often it compounds.

The downside of CDs is that they aren’t as flexible as savings accounts. You can’t just withdraw whenever you want and may face early withdrawal penalties if you want your money before the savings term is complete. (On the flip side, this can “force” you to save money, which is helpful if you struggle with impulse spending!)

How to invest in a certificate of deposit

Many banks and credit unions also offer CDs to customers seeking a higher-interest alternative to savings accounts. Investopedia also has a list of the highest current CD rates, so that’s a great place to start your research. Decide how long you’re willing to have your money locked up and choose accordingly.

3. Treasury bonds or notes

The U.S. government offers a variety of bond and note investments through TreasuryDirect. These are safe and stable investment choices that let you lock in a good rate for the future.

Also called T-bonds, treasury bonds are extremely long-term investments with terms of 20 or 30 years. Treasury notes (T-notes) come with shorter terms of 2, 3, 5, 7, or 10 years. You can decide to sell bonds and notes before they mature without facing a penalty.

Both T-bonds and T-notes come with a fixed interest rate, paid every six months until maturity.

However, unlike with many other compound interest investments, the interest doesn’t automatically get added to the principal amount. Instead, it gets paid to you directly. That puts the compounding decisions in your hands. 

If you own T-bonds or T-notes and want to make your interest compound, save up your interest payments and use them to buy more bonds or notes. You can buy them in increments of $100, so as soon as you’ve earned $100 in interest, you can get a new bond and keep the interest accruing!

For those who want their interest to compound automatically, check out EE or I savings bonds. EE bonds come with fixed interest, while the interest on I bonds can change every 6 months based on the inflation rate. 

How to invest in treasury bonds or notes

Start by creating an account on TreasuryDirect if you don’t already have one. This is the simplest and most direct way to research current rates and make purchases.

You can buy EE or I savings bonds anytime. If you want T-bonds or T-notes, you have to wait for specific bond auction dates to buy them.

4. Corporate bonds & bond funds 

The government isn’t the only place you can get bonds. Corporate bonds are debt securities that individual companies issue. Bondholders essentially loan money to these corporations to help finance their growth and operations. In exchange, they receive regular interest payments. 

Bond funds are similar, but instead of investing in one bond from one company, you’re investing in a pool of bonds managed by an investment company. This helps diversify your investments, which reduces the risk you might face from any one company defaulting on their debt.

Traditional bonds don’t offer compound interest, although you can choose to reinvest your profits in more bonds or bond funds. Zero-coupon bonds are an exception to this rule. When you have a zero-coupon bond, you don’t get paid periodic interest.

Instead, the interest compounds over the term of the bond, and you receive everything as one lump sum on the maturity date.

How to invest in corporate bonds & bond funds 

You’ll need an account at a brokerage (e.g. Vanguard, Fidelity, etc). There, you can purchase bonds and bond funds, as well as stocks and other types of investments. Bonds are a simple way to learn how to start investing.

5. Money market accounts

A money market account (or MMA) is another type of interest-bearing account offered by many financial institutions. It shares an acronym with “mixed martial arts” and might be just the thing to get your money into fighting shape!

MMAs traditionally function like a kind of hybrid between checking and savings accounts. Like a checking account, they may allow you to use a connected debit card and write checks. Like a savings account, they tend to pay higher interest rates, and you can expect interest to compound on a daily or monthly basis.

Some money market accounts have minimum deposit requirements, which makes them a bit less flexible than the average savings account.

However, there are also plenty of MMAs without strict requirements. These can be a great alternative to traditional savings accounts! 

How to invest in money market accounts

Check out which banks are offering the best rates on money market accounts right now. Review the terms and benefits of each one to decide if you’d like to open an MMA.

6. Peer-to-peer (P2P) lending opportunities

With most of the best compound interest investments on this list, you aren’t doing any direct lending. Instead, you’re engaging with a middleman (like a bank or investment firm) to handle the loan logistics while you just provide money. With peer-to-peer (P2P) lending, it gets a lot more personal.

Through a P2P lending platform, you lend money directly to individuals or businesses that need it. In exchange, of course, they pay you interest on the loan. You can harness the power of compounding by reinvesting that interest in other loans or investments.

P2P lending can offer attractive interest rates compared to some of the other options on this list.

However, you also face an increased risk. If any of your borrowers default on their loans (aka stop paying), you’re the one who absorbs that loss. 

Many peer-to-peer lenders enjoy having a more personal involvement in their investments compared to simply buying stocks and bonds.

For instance, it can be satisfying to help fund a business with a mission you care about and watch them grow.

How to invest in peer-to-peer (P2P) lending opportunities

Find a trustworthy P2P lending platform that works for you. Some have strict requirements for their investors, like a certain income or net worth. Here are some of the most accessible P2P lending platforms for investors.

7.  Dividend stocks

These next few investments are a great example of compounding growth since they don’t technically pay interest. I mentioned dividend stocks earlier, so let’s learn more about them now.

Dividend stocks are just like other stocks: they’re shares of a publicly traded company. The value of a dividend stock can go up or down at any time, depending on the market and the company’s performance. 

What sets dividend stocks apart is that they regularly distribute a portion of their earnings to their shareholders in the form of dividends. You can turn this into a compounding investment by reinvesting your dividends to purchase more shares, which in turn leads to an increase in your overall dividend income over time.

However, you should note that there’s no guarantee a company will continue paying dividends. They could decide to reduce their dividend payout or even eliminate them in some circumstances. Plus, the company’s stock could go down, so it’s best not to rely on this as an income source.

How to invest in dividend stocks

You can buy dividend stocks through any stock market brokerage. Or, you can diversify your risk by purchasing shares of dividend funds (which contain a variety of different dividend stocks).

Dividend funds may pay you dividends as income or may automatically reinvest the money so it can compound.

8. Index funds and ETFs

Index funds and exchange-traded funds (ETFs) are very similar investments. They’re both collections of stocks, bonds, and other securities that track an underlying index (the biggest example is the S&P 500 index). 

The main difference is that ETFs are easier to buy and sell throughout the stock market trading day just like stocks on the open market. Index funds are only available for trading at the end of the day trading price. They are also typically bought directly through the fund company and may have higher barriers to entry (like minimum investment amounts).

Investing in index funds and ETFs is widely considered one of the smartest financial moves you can make. That’s because both of them have diversification built right in.

If you buy a total-market fund, you can essentially own a little piece of the entire US stock market!

Many brokerages allow you to set up automatic dividend reinvesting, allowing your investment to grow over time through the power of compounding. 

How to invest in index funds and ETFs

You can buy ETFs through any brokerage or stock trading app. Index funds are available through their providers; most major brokerages have their own index funds. Learn more about investing with index funds to see if it’s the right choice for you.

9. Real estate/REITs

Do you have a passion for property? Investing in real estate could yield a higher return than other investments, and it can also provide a steady income stream. 

Traditional real estate investments require a larger amount of capital upfront since you’ll need to buy properties and get them rental-ready.

Whether you buy residential or commercial property, you’ll earn income by leasing your property to tenants. Reinvest your profits by improving your properties or purchasing new ones.

If landlord life doesn’t sound like your thing, don’t worry! There are simpler ways to invest in real estate. REITs, or real estate investment trusts, offer a way to invest in real estate assets through the stock market.

By law, REITs have to distribute at least 90% of their taxable profits as dividends to the shareholders. You can reinvest these REIT profits to compound your investment.

How to invest in real estate/REITs

To invest in real estate or REITs start by doing your research. For real estate, explore locations, property options, and financing options. You’ll also need to do some math to figure out the potential profit margins. REITs can be purchased at a brokerage just like you would index funds.

It all depends on what kind of investing you want to pursue! Discover more about real estate investing for beginners and decide how to build your wealth.

Expert tip

You can choose from multiple investment options. But the main point is that your money isn’t just sitting there – it’s creating more money for your future. You can start off simple with a high-interest savings account and then work up to more complicated investments later once you feel that you understand the process.

It may also be a good idea to diversify your money by placing it in a few different compound interest investments, especially if it’s a large amount.

What is compound interest?

In the most basic terms, you can think of compound interest as “the interest you earn on interest.”

But how does compound interest work? To help establish our foundation, it helps to understand what exactly interest is. Interest refers specifically to the cost of borrowing or lending money.

If you’ve ever had a loan, you’re familiar with paying interest. Earning interest is a lot more fun, though! 

So, how do you earn interest? Let’s say you decide to store your money in an interest-bearing account at a bank.

The bank then uses your money to make money via lending and pays you a percentage of the interest while also keeping some profit for themselves. On your end, you don’t have to worry about lending risk: your money is secure thanks to FDIC deposit insurance, and you’ll receive regular interest payments. 

Compound and simple interest

Interest generally comes in one of two forms: compound or simple.

When an investment pays compound interest, each interest payment you earn gets added to the original amount you put in (your principal). Then, the next interest payment is calculated on that new total (principal + accumulated interest).

This process continues indefinitely, allowing you to make more money from your investments in the long run as the interest earned compounds upon itself. (We’ll look at an example in the next section!)

Compounding can happen faster or slower depending on how frequently interest is calculated and applied to the investment. Interest could compound daily, monthly, quarterly, semiannually, or annually. The more often it compounds, the faster your investment will grow.

The opposite of compound interest is simple interest. This means that interest is only calculated using the original principal amount. Accumulated interest is not added to the calculation.

How does compound interest grow your money?

The simple answer: with compound interest, your money makes money, then that money makes money too! That translates to constant, automatic growth.

Investing example

Here’s a quick example of how it works:

First, you invest $1,000 into an account that pays 5% APY (annual percentage yield). To keep it simple, we’ll say the interest is paid yearly, and you don’t add any new funds to the account as time goes by.

At the end of year 1, you’ll earn $50 in interest, so you will have $1,050 in the account.

During year 2, you’ll earn interest on that new balance of $1,050. That means you’ll earn $52.50, and your balance will increase to $1,102.50.

Interest for year 3 clocks in at $55, continuing to increase your balance.

This process will continue until you withdraw the money or something else happens, like a drop in interest rates. If you don’t touch the money and the rate remains the same, each interest payment should be more than the last.

As you can see, compound interest makes your money grow without any extra effort from you. You didn’t have to do anything except save money in the right type of account and give it time.

How long will it take to double your money?

The amount of time it takes for compound interest to double your money depends on several key factors: the rate of return, the length of the investment, and the frequency of compounding. You can use a compound interest calculator to easily crunch the numbers.

For example, if you invest $1,000 in an account that offers a 5% rate of return, and it compounds monthly, it would take a little over 14 years to turn that into $2,000. Doubling it to a 10% interest rate would cut that to just over 7 years. 

If you continue making contributions to the account on a monthly or yearly basis, your money will obviously add up a lot faster!

Is compound interest the same as compound growth?

People often use the terms “compound interest” and “compound growth” interchangeably. However, there is technically a difference. Compound interest is essentially “the interest you earn on interest.”

Compound growth, on the other hand, factors in the “interest that you earn on interest” and represents the average rate of growth on your investments based on the reinvestment of interest earned and dividends, as well as investment appreciation over a period of time e.g. multiple years.

One thing to keep in mind when it comes to compound growth is that all investments can grow, but not all investments pay interest. e.g. Some investments earn dividends and can appreciate.

For example, Let’s say that instead of investing in an interest-bearing account, you buy dividend stocks. You still get regular payments based on a set percentage rate, which can then be reinvested to help you buy more stocks or earn more money.

However, the money you get from dividend stocks isn’t technically “interest”—it’s a “dividend yield.” Which is an annual payment to shareholders based on the current price of the investment.

Since compound interest and compound growth have a similar mechanism, our list of best compound interest investments will include multiple investment types, not strictly interest-bearing ones. As long as they’re expected to grow regularly and allow you to reinvest the money, these investments can all help compound your wealth!

If you enjoyed this article on compound interest investments, check out this related content:

Choose the best investments for compound interest for you!

What are the best investments for compound interest for your situation? That part’s up to you! For the best results, you can leverage a mix of the best compound interest investments. 

To start, I recommend opening a high-yield savings or money market account to store your emergency fund. You can also use these for any other savings you want to keep stable and easily accessible, like sinking fund categories.

After that, you can open a retirement savings account and start filling it with investments like dividend funds, ETFs, bonds, etc.

You can decide to devote any extra money to treasury bonds, real estate investments, CDs, P2P lending, or whatever else makes sense for your financial situation.

No matter what direction you go in, it’s important to do your research before investing.

There are risks associated with all types of investments, and you want to be confident in your choices. (Take our quiz to find out how risk-averse you are.) Knowledge is power, so keep researching and learning more!

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