How does interest benefit personal savings?

Interest benefits personal savings primarily by accumulating over time, which effectively increases the total amount saved. When money is deposited in savings accounts or invested in financial instruments that offer interest, the amount of money grows due to the interest earned. This growth occurs because the interest can be compounded, meaning that over time, not only does the initial amount earn interest, but the interest that has already been credited also begins to earn interest. This compounding effect can lead to significantly higher savings compared to simply storing money without earning interest.

For example, if someone deposits $1,000 in a savings account with a 5% annual interest rate, they will earn $50 in interest after one year. In the following year, if they leave that total $1,050 in the account, they will earn interest on the new total, not just the original deposit. Over time, this can lead to an exponential increase in savings, making it a powerful incentive for personal financial management.