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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, earning you income on deposits.
Thanks to ongoing Federal Reserve rate hikes, interest rates are hitting recent highs. It's a good time to have money invested in a savings account.
And the best part is, some banks adjust their rates automatically, no work needed on your part. You may even be making more money from your deposits without realizing it -- but first, you’ll want to know what an interest rate is and why it matters.
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
The simplest way to find your current savings account interest rate is online:
Along with your interest rate, most banks will 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 ask your bank directly. You can ask a bank’s chatbot, 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.
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 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
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 two things: 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.
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, you earn income based on how much money you have in the account. So, you'll earn interest on all the money you have deposited, which includes the interest you already earned on your deposit last month, and the month before, and so on.
According to the Federal Deposit Insurance Corporation (FDIC), the current average interest rate for savings accounts is 0.42%. Yes, less than a single percentage point. Believe it or not, that’s almost five times higher than it was a year ago.
While the average rate is very low, the best savings accounts offer much higher interest rates. Thanks to recent Federal Reserve rate hikes, top-tier rates have skyrocketed. A good interest rate in today's market is 4% or higher. But an interest rate of 2% 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.
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|
RELATED: See The Ascent's complete guide on how to calculate interest rate on savings accounts.
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. Enter 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 boosts your savings.
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.
A good interest rate is anything above 4%, though a rate above 2% is still competitive. According to the FDIC, the average interest rate on savings accounts is 0.42%.
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:
You can use a compound interest calculator to explore different rates and compound schedules.
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