Here’s What Saving $5 Every Day for 10 Years Could Do for Your Savings

The best part of this is that you could have nearly $21,000 to build from after 10 years. At 3.00% interest in year 10, that balance is earning more than $50 per month.

Simple Savings Options for $5 Per Day

Banks often offer two types of savings accounts: regular, run-of-the-mill accounts and high-yield accounts. The latter pays a higher rate of interest, as the name suggests. Either might cap the number of transactions you can make per month, but this can be a good thing. You’re less likely to spend it if you can’t withdraw your money without penalty. Some also require that you maintain a minimum balance in the account, and there may be maintenance fees that can regularly take bites out of your balance.

High-yield accounts can pay interest at rates that are as much as 10 times higher than traditional savings accounts.

But, of course, this is banking, so there are a few catches. You’ll probably have to deposit at least $100 to open the account, and banks sometimes place limits on just how much of your balance they’ll pay the higher rate on. They might place an overall cap on interest paid in a year.

How Are Interest Rates Determined?

Banks set their own interest rates. Over the years, you likely won’t continue to receive the same interest rate the bank was paying at the time you opened the account. The rate will go up and down because these APYs are variable.

If the Fed moves rates up or down, banks and credit unions typically follow.

“Bank savings rates float with the interest rate environment and competition,” said Steven Rogé, Chief Investment Officer and CEO of R.W. Rogé & Company, Inc. “Online banks often pay more because their costs are lower. Banks with more deposits than they need will pay less, while banks hungry for deposits pay up. Promotional ‘teaser’ rates, minimum balance rules, and account type also matter.”

All this boils down to the annual percentage yield (APY) you’ll receive. This number typically is slightly higher than the interest rate and represents earnings over one year. So an account with a 4.89% interest rate might have a 5.00% APY because the APY includes compound interest in the calculation. The difference between the interest rate and the APY can vary based on how often the bank calculates and deposits earnings into your account, which could be quarterly, monthly, or even daily.

The Gift of Compound Interest

Simple interest is paid on just the money you’ve deposited into your account. Compound interest, on the other hand, is paid on your deposits plus the previously paid interest that’s accumulated in your account.

“You earn interest on your money, then interest on your interest, and the snowball keeps rolling,” Rogé said.

Say you have $1,000 in your account. Your balance is earning simple interest at a rate of 4.00%. You have $1,003.33 after one month ([$1,000 x 0.04] / 12 months). Your 4.00% rate is now calculated on $1,003.33, not $1,000, if you’re receiving compound interest. Interest can compound monthly, yearly, or daily, depending on your bank.

The Bottom Line 

With a high-yield savings account, you can earn a significant amount of interest over a decade, even if you’re depositing the equivalent of $5 per day. (That’s about $150 to $155 per month.)

You don’t have to make those deposits daily, particularly if you have to trudge off to a brick-and-mortar bank to do so. That jar or mattress can take care of things for you until the end of the week or the month, just as long as you remember to move the money to a place where it can earn for you sooner rather than later. Remember: interest is free money.

“Time matters more than rate,” Rogé said. “Start the $5 habit now, then hunt for better yield when you have the bandwidth.”