It may come as no surprise that a savings account is a good place to store your money. Savvy savers know that savings accounts tend to offer higher interest rates than checking accounts. Sign me up, right? While a savings account sounds like a sweet deal, you may still be wondering: How does savings account interest work? Fair question. Yet understanding how interest works on a savings account is an important part of maximizing the earnings on your hard-earned, carefully stashed, cash.
At its simplest, interest is the cost of borrowing money. For many people, opening a savings account is one of the easiest ways to go about this. When you put money in a savings account, the bank is technically borrowing the money and paying you interest in return. The interest rate determines how much money a bank pays you to keep your funds on deposit. However, Michael Griffin, a certified public accountant and finance professor, says you should use the annual percentage yield APY to compare savings accounts and other savings products.
Your savings account interest could compound daily, monthly, quarterly or annually. If the account has a 1. The APY will also be 1. If a bank offers a 1.
Lucky for savers, many banks offer savings accounts with interest that compounds daily or monthly, rather than annually.
But over time, it can keep growing and growing. It depends on your account. With most savings accounts and money market accounts, you'll earn interest every day, but interest is typically paid to the account monthly. Banks and other financial institutions charge an interest rate any time you borrow money. Meaning, you pay back what you borrowed and then some. They do this for a couple of reasons.
First, every time they loan you cash, they are taking a risk that you might not pay them back. The second reason is when you borrow from the bank, they can't invest the money you borrowed. Generally, savings account rates are lower than interest rates to maintain a functioning partnership between you and the bank. This site is for educational purposes. The material provided on this site is not intended to provide legal, investment, or financial advice or to indicate the availability or suitability of any Capital One product or service to your unique circumstances.
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The total might be different if you borrow the money over a longer or shorter period.
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