Diminishing returns as compounding intervals shorten
Compounding frequency determines how often interest is calculated and added to principal. Annual compounding compounds once per year. Monthly compounds 12 times. Daily compounds 365 times. Continuous compounding approaches infinity. The more frequently interest compounds, the more total interest you earn, because interest earns interest more often.
Starting with $10,000 at 6% annual rate: annual compounds to $17,908 after 10 years; monthly to $18,194; daily to $18,221. The difference between monthly and daily is just $27 on $10,000. The difference between annual and monthly is $286, far more meaningful. As compounding intervals shrink, marginal gains decline sharply.
When frequency matters and when it does not
For savings accounts and CDs, daily compounding is standard, yet monthly or quarterly would yield nearly identical results. The difference is negligible and not worth seeking out a specific product for.
Compounding frequency matters more with higher interest rates and longer timescales. At 12% annual rate compounding to continuous over 30 years, the difference between annual and continuous compounding swells to thousands of dollars. Credit cards also exploit frequency: they compound interest daily (even though quoted as an annual rate), inflating effective rates and making high-balance card debt dangerous. For most personal finance decisions, compounding frequency is a minor detail; focus on the interest rate and time invested instead.