Savings accounts with compound interest apply your interest earnings back to your principal balance, which then earns additional interest on itself. For example, a 2% compound rate on £1,000 principal means the first year you earn £20 interest. The second year collects 2% interest on £1,020 balance, earning £20.40.

This is usually the most common form of interest but it is always worth asking the question.

On savings accounts with simple interest, your interest accumulates on only the original principal amount. Using the £1,000 at 2%, you would continue collecting £20 each year on that £1,000 principal untouched. No compounding occurs.

A deposit refers to any new money added into your savings account, contributing to the overall account balance or principal. The principal is the base amount in your account that interest earnings will be calculated on.

For example, if you open a savings account by depositing £1,000, this establishes a £1,000 principal balance. Any further deposits add to that principal amount which drives greater interest earnings based on that growing total principal through compound growth over time. Consistently building your savings account through routine deposits results in your principal, including interest earnings already credited back to it, snowballing faster while taking advantage of compound interest acceleration on a bigger base balance.

Annual Percentage Yield (APY) represents the true annual return rate on a savings account, factoring in the effect of compound interest. For example, a savings account with a 2% APY, applied monthly on a £1,000 deposit, yields around £20 in interest the first year. The second year collects 2% interest on £1,020 already saved, equaling £20.40. The compound interest concept results in an APY higher than 2% over time. Understanding APY distinguishes higher earnings accounts quicker. Monitoring changing APYs prompts savvy savers to shift funds to maximize returns over the long run.

Banks charge various fees on savings accounts that subtract from overall returns, including:

Monthly Maintenance Fees – Charged if your account balance falls below the minimum required. Keeping sufficient funds avoids fees.

Excess Activity Fees – Assessed if you exceed monthly withdrawal/transfer limits. Tracking activity prevents overages.

Out-of-Network ATM Charges – Using another bank’s ATM can incur fees. Minimising withdrawals optimises earnings.

Account Closing Fees – If you shut down a savings fees  may apply. Reading fine print prevents surprises.

Each bank and saving account differs with fees and ultimately a bank will want you to invest with them, so always search around for the best deal on your savings. 

Risk represents the possibility of losing original investment principal due to market volatility.  With any savings account there could be an amount of risk so understanding it and asking questions is always advised.