For instance the portfolio in our example which was compounded at 12 per cent was worth almost three times as much at the end of 35 years as the same portfolio compounded at eight per cent. Consider another example. The money is safe, protected by Canadian Deposit Insurance. But safety of principal and ease of access have a price. Another consideration is the frequency of compounding.
Some banks calculate interest semi-annually.
The interest is calculated every six months and paid on the minimum monthly balance. There are many alternatives to holding money in a savings account. Money market funds pay an average of 5 per cent per annum in interest and that interest is re-invested monthly. At first blush, the difference between the two rates may not appear significant. But let's look at how much money you would have at the end of five years if you leave the money in the bank.