Those new to banking -- or even some who have been at it a while -- may be surprised to learn that not all interest is bad. Unlike the interest fees you're charged for credit products, savings account interest works for you, rather than against you.
What is savings account interest?
The interest on a savings account is the fee you earn for keeping your money in the bank. Why?
Banks use the collective money deposited by account holders to finance loans and other investments. Interest fees are paid to you by the bank as compensation for letting them use your deposits as capital for investments.
(Don't worry, the bank never uses all of its deposits; you can withdraw your money at any time.)
How much interest you earn on your money is determined by your savings account's interest rate. As such, one of the first things we should all ask when evaluating a savings account is, "What is my interest rate on my savings account?"
The very best savings accounts will offer a high interest rate that can help boost your savings. How much interest you earn will vary a lot depending on the bank and account type, so it's important to shop around for the best rates.
Related: The Best Savings Accounts
Where to find your savings account interest rate
The simplest way to find your current savings account interest rate is online:
- Log into your online banking account through a web browser or the bank's mobile app.
- Select the account you want more information about.
- Then, look for a section that says "account details" or similar.
- Scroll until your find your interest rate
Along with your interest rate, most banks will also list how much interest you've earned so far this year.
If you can't find your rate online or in the app, you can also ask your bank directly. You can call the customer service line or head into a local branch. Your rate may also be listed in any documents you received when you first opened your account.
How to find the interest rate on a new account
It's a good idea to compare interest rates when shopping for a new savings account. In this case, the best place to find the interest rate is likely the bank's website.
Some banks will have one page that compares all of their savings products. Other banks will have a dedicated page for each type of savings account.
Savings account interest rates can often vary depending on your location. So, you may need to provide your ZIP code to see the potential interest rate on a new account.
Related: How to Open a Bank Account Online
Interest rate vs. APY
The interest rate on your savings account may be listed as an APY, rather than an interest rate. APY stands for annual percentage yield. The APY is how much interest you can expect to earn over one year. An APY is based on both the interest rate and how often the interest is compounded.
Learn more: What Is APY?
Savings account interest can be paid out daily, monthly, quarterly, or yearly. The amount of interest earned is calculated at the time it is paid out based on the total balance of your account. This includes both your initial deposit -- the principal -- plus any interest you've earned so far.
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What is compound interest?
Compound interest is when you earn interest on both your principal and the interest you've already earned to date. How often an account pays interest is how often it compounds.
Learn more: How Does Compound Interest Work?
For example, a savings account with an interest rate that compounds monthly will pay you interest once a month. Each time the interest pays out, it is based on how much money you have in the account at that time. So, you'll earn interest on the money you deposited, plus the interest you earned on that money last month, and the month before, and so on.
Related: Is the interest rate for savings accounts monthly or yearly?
What is the average interest rate for a savings account?
According to the FDIC, the current average interest rate for savings accounts is 0.06%. Yes, less than a tenth of a percentage point.
What is a good interest rate on my savings account?
While the average rate is very low, the best savings accounts offer much higher interest rates. A good interest rate in today's market is 1% or higher. But an interest rate of 0.5% or more would still be considered competitive.
The type of bank and account you have will be the main factor in the interest rate you receive. For instance, online banks tend to offer higher interest rates. This is because online banks have lower overhead (the cost of running a business).
Learn more: Online vs. Brick-and-Mortar Banks
In some cases, how much money you deposit will influence your interest rate. Many banks offer higher-interest savings accounts that have large minimum deposit requirements. These accounts may also charge higher monthly fees, so be sure to check the fine print.
How to calculate savings account interest
It's one thing to know your savings account's interest rate -- and another to turn that into a real dollar amount. That's because it's not as simple as multiplying your principal deposit by your interest rate. You have to take the compound interest into account.
Most savings accounts compound interest monthly. So, you need to calculate the interest based on the new balance each month. Here's an example of how much interest you could earn on a $10,000 deposit in one year compounded monthly with different interest rates:
| Interest Rate | Interest Earned |
|---|---|
| 0.1% | $10.00 |
| 0.5% | $50.11 |
| 1.0% | $100.46 |
| 1.5% | $151.04 |
| 3.0% | $304.16 |
Data source: Author's calculations.
RELATED: See The Ascent's complete guide on how to calculate interest rate on savings accounts.
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There are tools that can help
An easy way to figure out how much interest you'll earn is to use a compound interest calculator.
You can find compound interest calculators for free online and in mobile app stores. You can input your principal, interest rate, and how often it compounds to see how much you'll earn over a given period of time. Compound interest calculators are a good way to see how a higher interest rate can affect your savings.
FAQs
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An easy way to find your savings account interest rate is through your online bank account.
Log in through a web browser or your bank's mobile app. Select the account you want and look for the "details" link or menu. (It may say "more details," or "account details," or something similar.) The interest rate should be listed in the account details.
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A good interest rate is anything above 1%, though a rate above 0.5% is still competitive. According to the FDIC, the average interest rate on savings accounts is approximately 0.06%.
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The amount of interest you'll earn on $1,000 in one year depends on the interest rate and how often it compounds. Most savings accounts compound monthly. Here's what that would look like with a few different interest rates:
- $1,000 at a rate of 0.1% would earn $1.00
- $1,000 at a rate of 0.5% would earn $5.01
- $1,000 at a rate of 1% would earn $10.05
- $1,000 at a rate of 1.5% would earn $15.10
- $1,000 at a rate of 5% would earn $51.16
You can use a compound interest calculator to explore different rates and compound schedules.
About the Author
Brittney started her writing career in the world of science, putting her physics degree to good use. Her journey into finance started with building her personal credit, but soon grew into a borderline obsession with credit cards and travel rewards. For the last 7 years, she has enjoyed the ability to share her expertise with readers, as well as the opportunity to interview companies and individuals making an impact on our financial lives. She wholly believe most problems can be solved with the right research -- and a good spreadsheet -- and she specializes in translating complex financial topics into actionable advice to help educate and empower readers.
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