Do You Get Interest on a Savings Account?

A savings account serves as a secure place to deposit funds while allowing them to grow over time through earned interest. This financial product is commonly offered by banks and credit unions. The interest accumulated represents a return paid by the financial institution for the use of your deposited money.

Understanding How Interest Accrues

Interest on a savings account is money paid by the bank to the account holder for the use of their deposited funds. This amount is typically expressed as an Annual Percentage Yield (APY), which represents the total interest earned on an investment over one year, taking into account compounding. A higher APY indicates a greater return on savings. Savings accounts primarily use compound interest.

Compound interest means that interest is earned not only on the initial principal but also on the accumulated interest from previous periods, creating a snowball effect over time. Compounding frequency, such as daily, monthly, or quarterly, impacts the total earnings; more frequent compounding generally leads to higher overall returns. Most savings accounts calculate interest daily but credit it monthly.

Key Factors Influencing Interest Rates

Several factors influence the interest rates offered on savings accounts, causing them to fluctuate or differ between financial institutions. The Federal Reserve plays a significant role, as its adjustments to the federal funds rate influence borrowing costs for banks and the rates they offer on deposits. When the Federal Reserve raises rates, savings account rates tend to increase, and when they lower rates, savings rates often decrease.

Broader economic conditions also affect interest rates. Factors such as inflation and overall economic growth can lead banks to adjust their rates. Banks also consider their own operational costs, their need to attract deposits to fund loans, and competitive market conditions when setting rates. Online banks, with lower operating costs, may offer more competitive rates.

Different Savings Account Options

Individuals have various options for accounts that earn interest on their savings, each with distinct characteristics.

Traditional Savings Accounts

Traditional savings accounts offer basic features, easy access to funds, and typically lower interest rates. They are suitable for short-term savings goals or emergency funds due to their liquidity.

High-Yield Savings Accounts (HYSAs)

High-yield savings accounts (HYSAs) offer significantly higher interest rates than traditional savings accounts. Online banks often provide HYSAs, passing on cost savings to customers through better rates. Some HYSAs may have specific requirements like minimum balance thresholds.

Money Market Accounts (MMAs)

Money market accounts (MMAs) blend features of both savings and checking accounts. They offer competitive interest rates, often higher than traditional savings accounts, and may include limited check-writing privileges or debit card access. MMAs often require higher minimum balances.

Certificates of Deposit (CDs)

Certificates of Deposit (CDs) involve depositing funds for a fixed period, from a few months to several years, for a fixed interest rate. CDs generally offer higher interest rates for longer terms. Funds are locked in until maturity, with penalties for early withdrawal.

All these account types, when offered by banks, are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per insured bank, per ownership category.