The interest rate on your savings account is crucial to calculating how much your balance will grow. It’s important that you earn the maximum rate of interest to build on your savings as quickly as possible, but sometimes the rate quoted doesn’t match the interest returns you receive.
*Disclaimer: How we chose the best savings account by APY
Some accounts may offer more convenient or advantageous features than others. We’ve highlighted the accounts below based on factors like commercial partnerships, interest rates, fees, application requirements, account features and other variables that might affect your ability to save.
No single account will be right for everyone, so we encourage you to compare your options to find the one that’s best for your situation.
EQ Bank Savings Plus Account
Account fee: $0
Min. deposit amount to open account: $0
Max. balance amount: $200,000
Account type: Savings
No monthly fees
No minimum account balance
EQ Bank Savings Plus Account
Enjoy free and unlimited daily transactions, no fees and no minimum balance with an EQ Bank Savings Plus Account.
If you open a high-interest savings account, the money you deposit will earn interest at a particular rate. However, in some cases you may find that the interest earned on your account doesn’t match the maximum rate quoted. There are a few reasons why this can occur:
There’s the introductory rate that a bank uses to get you in the door, and then there’s the long-term rate applied to your account. Some banks — particularly smaller ones — will temporarily raise their interest rates above the usual level. Then, in a few months, they drop back down.
When opening an account, look at the historical interest rates the bank has offered — major swings can be a red flag.
Karen opens a savings account with a small bank that offers an introductory rate of 3%, but after six months the rate drops down to 1.5%. Bethany looks into the historical rates of her bank before opening an account to make sure her interest rate won’t vary too wildly, and her rate of 3% stays the same over the course of the year.
3% for the first six 6 months, 1.5% for the second 6 months
As the table shows, even though Karen and Bethany deposited the same amount of money, Karen earned $1,148.92 less in one year because her interest rate changed.
The type of interest rate you have
Another important factor that affects the interest you can earn on your savings balance is whether your account pays simple interest or compound interest. Simple interest is only paid on the money you deposit into your account, but compound interest allows you to earn interest on the initial deposit and the interest payments you received up until that point — in other words, you can earn interest on your interest.
How often interest is compounded
The interest on your account could be compounded daily, monthly, quarterly, biannually or annually, and the frequency with which it occurs can make a difference to your balance. The more interest is compounded, the more chances you have to earn interest on your interest.
Adam is in his early 20s and wants to start saving for a house. He has an initial investment of $5,000.00 and plans to deposit $500.00 each month for the next five years. Assuming an interest rate of 2.00%, let’s look at how Adam’s balance differs based on whether interest is compounded daily, monthly or annually.
Ongoing monthly deposit
Adam will earn $21.48 more in interest by choosing an account that compounds interest daily. The longer Adam saves, the more interest he can earn on his interest.
Some banks have different interest rates depending on how much money is in your account. For example, balances below $10,000 could have a rate of 0.5% while balances that exceed $10,000 have a 1.5% interest rate. With multiple rates potentially applying to your account, the maximum rate available will fluctuate with your bank balance.
Otherwise, you can track changes to your interest rate by monitoring your account statements. Depending on how often you receive statements and how closely you read them, it could be some time before you realize that the maximum rate on your account has changed.
Taking the above examples into account, there are a few simple steps you can take to ensure that you always earn the highest interest rate:
Shop around. Before choosing an account, compare savings accounts to find one that offers a high rate. Remember to investigate account fees, features and accessibility before you make your decision.
Check the market. The savings account sector is a competitive area of the banking industry, with new accounts and better interest rates becoming available all the time. With this in mind, it pays to review your savings account once a year to see if you could get a better deal elsewhere.
Check your statements. Are you worried that your bank may have adjusted the interest rate on your account without you realizing? Check your most recent statement to make sure you’re earning a competitive rate.
Choose compound over simple interest. Simple interest accounts only allow you to earn interest on your initial deposit, while compound interest accounts allow you to earn interest on your interest.
Check how often interest is compounded. The more often interest is compounded, the more your balance will grow. An account that compounds interest daily or monthly will earn more than an account that compounds annually.
Opening a savings account with a high interest rate can help you earn a big return on your balance. However, two accounts that advertise the same interest rate can pay very different returns by the time you need your money back.
To get the most out of your account, shop around for the terms and conditions that will save you the most.
Frequently asked questions
When shopping around for a savings account, you might notice that some banks list the interest rate they pay, while others list the APY. The difference is that interest is the rate at which your balance will grow, while APY (annual percentage yield) is the amount you’ll earn per year based on the interest rate plus compound interest.
You might find that some of the Big Five banks or other larger institutions pay less interest than smaller banks or credit unions. The big banks often have more products and customers than smaller institutions, allowing them to generate significant earnings due to the sheer number of accounts, even though their rates are not as competitive. Many people value the security and convenience of big banks, so they won’t bother looking for the highest rate.
It depends on your situation. Savings accounts are an effective way to earn interest in the short term, but you could also consider money market accounts or interest-bearing checking accounts if you need a bit more flexibility. Guaranteed Investment Certificates (GICs) can also pay more interest than savings accounts, though you’ll have limited access to your money.
An online savings account is just like a standard savings account, but without the brick and mortar accessibility of other banks. Online banks do not have branches or offices, allowing them to reduce their overhead costs and pass down their savings to you in the form of higher interest rates.
Tim Falk is a freelance writer for Finder, writing across a diverse range of topics. Over the course of his 15-year writing career, Tim has reported on everything from travel and personal finance to pets and TV soap operas. When he’s not staring at his computer, you can usually find him exploring the great outdoors.
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