Here’s what saving $5 a day for 10 years can 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 the 10th year, this balance earns more than $50 per month.

Simple savings options for as little as $5 a day

Banks usually offer two types of savings accounts: regular accounts and regular accounts and high-yield accounts. The latter pays a higher interest rate, as the name suggests. Either one may limit the number of transactions you can make per month, but that may be a good thing. You are unlikely to spend it if you cannot 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 result in regular deductions from your balance.

High-yield accounts can pay interest at rates up to 10 times higher than traditional savings accounts.

But, of course, this is banking, so there are a few catches. You’ll likely have to deposit at least $100 to open the account, and sometimes banks will put limits on how much of your balance you’ll pay the top rate on. They may set a total limit on interest paid in a year.

How are interest rates determined?

Banks set their own interest rates. Over the years, you probably won’t continue to get the same interest rate that 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 interest rates up or down, banks and credit unions typically follow.

“Bank savings rates change with the interest rate environment and competition,” said Stephen 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 deposit-hungry banks pay.” Minimum balance rules and account type also matter.”

It all boils down to the Annual Percentage Yield (APY) you’ll get. This number is usually slightly higher than the interest rate and represents earnings over one year. So an account with an interest rate of 4.89% might have a 5.00% APY because the APY includes compound interest in the account. The difference between interest rate and APY can vary based on how often the bank calculates the earnings and deposits them into your account, which can be quarterly, monthly or even daily.

The gift of compound interest

Small interest is paid only on the money you deposit into your account. On the other hand, compound interest is paid on your deposits plus Interest prepaid and accrued in your account.

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

Let’s say you have $1000 in your account. Your balance earns 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 based on $1,003.33, not $1,000, if you receive compound interest. Interest can compound monthly, annually or daily, depending on your bank.

Bottom line

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

You don’t have to make these deposits every day, especially if you have to go to a physical bank to do so. This jar or mattress can take care of things for you until the end of the week or month, as long as you remember to move the money to a place where it can make money sooner rather than later. Remember: interest is free money.

“Time is more important than rate,” Ruggie said. “Start the $5 habit now, then look for a better return when you have the bandwidth.”