Daily vs Monthly Compounding: Which Grows More
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How It Works
Both apply the same nominal annual rate, but daily compounding uses (1 + r/365) raised to 365 x years, while monthly uses (1 + r/12) raised to 12 x years. More frequent compounding means interest starts earning interest sooner, so the effective annual yield is slightly higher. The difference versus continuous compounding is already negligible at daily frequency.
What Should You Do?
Do not choose an account mainly for daily versus monthly compounding; the rate itself matters far more. The practical lesson is to compound as often as possible and avoid idle cash. For borrowing, the reverse applies: less frequent compounding favors the borrower.
Frequently Asked Questions
Why is the difference so small?
At a 5% rate the effective yield gap between daily and monthly is a fraction of a percent, so dollars differ only slightly.
Does this apply to loans too?
Yes, but in reverse: more frequent compounding on a loan costs the borrower slightly more.
Is continuous compounding better than daily?
Only infinitesimally; daily is already within a hair of the continuous limit.
Which should I pick for savings?
Pick the highest rate and fewest fees; compounding frequency is a rounding error next to those.
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Learn More About This Topic
Compounding frequency affects growth, but only at the margin. The interest rate and time invested dominate; frequency is a minor refinement.