You saved €3,000 and left it in your current account. A year later it's still €3,000, but the shopping it can pay for has shrunk.
In short: interest is what a bank pays you for keeping money with it. Simple interest is paid only on what you put in; compound interest is also paid on the interest you've already earned. The difference is small in the first years and large after ten or twenty. For savings, the biggest step is usually the first one: moving the money from an account that pays nothing to one that pays something.
- Interest on what you put in
- Interest on the interest
- Time does most of the work
- It has to beat rising prices
A worked example
Made-up but realistic: €3,000 put aside once and left alone, with interest added once a year.
| After 1 year | After 5 years | After 10 years | |
|---|---|---|---|
| Current account, 0% | €3,000 | €3,000 | €3,000 |
| Savings account, 2% | €3,060 | €3,312 | €3,657 |
| Savings account, 4% | €3,120 | €3,650 | €4,441 |
€1,441
The first year only brings €120. That's why moving savings feels pointless, and why many people never do it. But each year's interest earns interest the next year, so the yearly amount keeps growing: €120 in year one, about €171 in year ten.
Simple vs compound
At 4% simple interest, the €3,000 earns €120 every year, no more. After ten years that's €4,200, against €4,441 compounded. After twenty years it's €5,400 against €6,573. The gap keeps widening because compounding builds on itself. The rule of 72 gives a quick estimate: at 4%, money doubles in about 72 ÷ 4 = 18 years.
What rising prices do
If prices rise 3% a year (a made-up figure for the example), €3,000 left at 0% will buy after ten years what about €2,232 buys today. The number in the account didn't move, but what it can buy did. A rate below price rises slows the loss; a rate above it is real growth.
The steps
1. Keep only this month in the current account
Bills, spending and a small buffer (30-day cash buffer). Everything beyond that is savings, and it can earn something.
2. Move short-term savings where they earn interest
The emergency fund and money for goals within one to three years belong in a savings account or a deposit. Safe, available, and paying a rate. Interest is usually taxed, so compare what you keep, not the headline rate.
3. Check the rate once a year
Introductory rates often drop after a few months. Put a yearly reminder in your calendar and move the money if your rate has fallen well behind what other banks offer.
4. Money for five years or more: consider investing
Over long periods, compounding is strongest where returns are higher, and that means accepting ups and downs (investment basics). The savings order shows when it's time.
The traps
- Waiting for a "big enough" amount. Compounding needs time more than a large start. Moved today at 4%, €3,000 has earned €650 five years from now. Left waiting for a rounder number, it earns nothing.
- Fixed-term deposits. They often pay more, but taking the money out early can cost the interest. Don't lock up the emergency fund.
- Monthly vs yearly rate. Rates are quoted per year. 4% a year on €3,000 is about €10 a month, not €120.
- It works against you too. A credit card balance compounds the same way, usually at a much higher rate. Paying off expensive debt comes before saving for interest.
Try your own numbers
The free investment calculator compounds monthly. Enter €3,000 as starting money, nothing monthly, 10 years and a 4% return, and the middle line shows about €4,472, a little more than the table because interest is added every month. For a savings account, read the middle line; the grey band is for market investments.
One thing to do today
Find out what rate the account holding your savings actually pays. If the answer is 0% or "I don't know", that's the first thing to change.
Where Volora fits
In Volora, savings can sit in their own wallet, separate from the current account, so the daily spending never quietly uses them. When the bank pays interest, record it as income in an Interest category, and a goal linked to the wallet shows how far you are from your target.