Skip to main content
Discover Logo Modern Money
  • Checking Account
  • Online Savings Account
  • Money Market Account
  • Certificate of Deposit
  • IRA Certificate of Deposit
  • IRA Savings Account
  • Discover Bank Blog Home
  • Banking 101
  • Saving
  • Budgeting
  • Career & Education
  • Family Finance
  • Retirement
  • Lifestyle
  • Home
  • Banking 101
  • Saving
  • Budgeting
  • Career & Education
  • Family Finance
  • Retirement
  • Lifestyle
    • Checking Account
    • Online Savings Account
    • Money Market Account
    • Certificate of Deposit
    • IRA Certificate of Deposit
    • IRA Savings Account
    • Compare Retirement Accounts
    • Find an Account

How Does Savings Account Interest Work? Here’s Your Guide

Confused by the concept of interest? This video will help set the record straight.

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. This means that with a savings account, you’re earning more money with your money. 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. It’s one that puzzles many. Yet understanding how interest works on a savings account is an important part of maximizing the earnings on your hard-earned, carefully stashed, cash.

Looking to understand interest? Here's how it works

We’ve got just the overview of how interest works on a savings account to get you started:

What is interest on a savings account?

At its simplest, interest is the cost of borrowing money. Generally, you’ll pay interest to borrow money, and you can collect interest when you lend money.

But who’s going to pay you to borrow your 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 bank determines the rate, although it’s affected by the general level of rates in the economy and whether the bank is trying to attract new deposits,” says Liz Weston, a certified financial planner and columnist at a personal finance website.

Your bank determines interest rate of a savings account

How does savings account interest work?

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.

“The simple way to look at the APY—it’s what you will get on your money,” Griffin says. Meaning, you can use the APY to determine how much you’ll actually earn in interest each year because the APY relies on two inputs: the interest rate and how often the interest compounds. Both are important components of how interest works on a savings account because they impact how much money you’ll earn over time. Your savings account interest could compound daily, monthly, quarterly or annually.

Suppose you deposit $5,000 into a savings account, don’t deposit or withdraw any more money and the interest rate doesn’t change. If the account has a 1.00% interest rate and the interest compounds annually—that is, the bank pays you interest on your balance once each year—you’ll earn $50 after the first year. The APY will also be 1.00% in this example because your interest didn’t compound multiple times during the year.

If a bank offers a 1.00% interest rate on a savings account, the rate of compounding could affect the APY and your earnings, although the differences may be minor.

“With interest rates so low,” Griffin says, “there is not a dramatic difference in relative small balances in a savings account because of different compounding scenarios.”

Take your financial knowledge to new heights

Sign up for our quarterly Modern Money newsletter.

Enter a valid email address.
Send me articles about (optional)
  • Saving
  • Budgeting
  • Retirement
  • All of the above
Please verify that you are not a robot.

By providing your email address, you are consenting to receive the Modern Money newsletter from Discover. Subscribing to this newsletter will not impact any other email preference you may have with Discover.

Loading…

However, your earnings can increase over time, especially when the savings account offers a higher interest rate and APY, and you’re regularly depositing money into your account.

Lucky for savers, many banks offer savings accounts with interest that compounds daily or monthly, rather than annually.

When looking for a savings account, consider interest rate and account features

Where interest meets account fees and features

Understanding how interest works on a savings account and comparing the APY offered at several banks are important steps in choosing where to open an account.

Weston says you can often get better returns from an online savings account because online banks don’t have to pay for branches and can pass the savings on to consumers. Online banks therefore “have advantages over traditional banks,” she says, “typically, no minimum account balance requirements or fees.” For example, a Discover Online Savings Account comes with no account fees.1

Keep an eye out for fees, like those for overdrafts or ATMs, when you’re comparing different savings account options. These could offset your interest earnings or even cost you more than you earn. Other potential expenses include fees for bank checks or outgoing wire transfers.

Use a savings account for your financial goals

So, what is interest on a savings account? Now that you’ve seen how interest works on a savings account and know what to look for when comparing accounts, you can put your new knowledge to work. Whether you’re saving for a new car, a vacation or building up your emergency fund, having a savings strategy can help you meet your goals.

A high-yield savings account can help you reach your financial goals

Weston says without a minimum deposit requirement, you could use online savings accounts and “set up as many accounts as you like and name them for different goals: vacation, holidays, property taxes and so on.” Separating your funds into different accounts earmarked for specific purposes can make it easier to resist temptations to spend randomly, which can ultimately help you reach your financial goals sooner.

If you want to focus all of your efforts in one place, another option is to have one account where you keep all of your savings. You could then use a spreadsheet to categorize your funds by bills, expenses or financial goals.

These are just two examples. Have a different idea about how to organize your savings? Try it out. As long as you’re progressing toward your goals, and using your newfound understanding of how interest works on a savings account, you’re headed in the right direction.

Articles may contain information from third-parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third-party or information.

1Outgoing wire transfers are subject to a service charge.

Take your financial knowledge to new heights

Sign up for our quarterly Modern Money newsletter.

Enter a valid email address.
Send me articles about (optional)
  • Saving
  • Budgeting
  • Retirement
  • All of the above
Please verify that you are not a robot.

By providing your email address, you are consenting to receive the Modern Money newsletter from Discover. Subscribing to this newsletter will not impact any other email preference you may have with Discover.

Loading…

Discover Bank, Member FDIC

Was this article helpful?

  • Yes this article was helpful.
  • No this article was not helpful.

Tags:

  • Financial Education
  • Interest Rates
  • Online Savings Account
  • Video
Related Article
APY vs. APR: The Difference Explained
Close
  • Share article on facebook.
  • Share article on twitter.
  • Share article on linked in.

Related Content

Why Open a Savings Account? 5 Reasons to Add Savings to Your Financial Mix
Money Market Account vs. Savings Account: Which Is Best for You?

You earned it.
Now earn more with it.

Online savings with no minimum balance.

Start Saving
DiscoverOnline
Savings

Discover Bank, Member FDIC

Banking on Your Terms

Checking Account: Enjoy Everyday Checking and Earn Cash Back While Doing It
Checking Account
Online Savings Account: Imagine an Online Savings Account Without the Monthly Fees
Online Savings Account
Money Market Account: Get the Best of Both Worlds: Flexibility and High Yields
Money Market Account
Certificate of Deposit: Lock in Your APY and Reap the Returns
Certificate of Deposit
Individual Retirement Accounts: Make Saving for Retirement a Lot Easier
Individual Retirement Accounts
Quick Quiz: Find the Account That's Right For You
Quick Quiz
Back To Top

Online Banking Products

  • Checking Account
  • Online Savings Account
  • Money Market Account
  • Certificate of Deposit
  • IRA Certificate of Deposit
  • IRA Savings Account
  • Compare Retirement Accounts
  • Find an Account
  • CD Rates

Help and Resources

  • FAQ
  • ATM Locator
  • Forms and Documents
  • Secure Document Upload
  • Mobile Banking
  • Apple Pay
  • Features and Benefits
  • Modern Money Blog
  • FDIC Insurance

Other Discover Products

  • Credit Cards
  • Home Loans
  • Personal Loans
  • Student Loans

About Discover

  • About Discover
  • Financial Education
  • Investor Relations
  • Merchants
  • Newsroom
  • Sitemap
  • Terms of Use
  • Security Center
  • Privacy
  • Contact Us
  • AdChoices
  • Facebook
  • Twitter
  • LinkedIn

©2022 Discover Bank, Member FDIC

Discover

© 2022 Discover Bank, Member FDIC

  • Equal Housing Lender
  • Equal Housing Lender
  • Equal Housing Lender

You are leaving Discover.com

You are leaving Discover.com and entering a website operated by a third party. We are providing the link to this website for your convenience, or because we have a relationship with the third party. Discover Bank does not provide the products and services on the website. Please review the applicable privacy and security policies and terms and conditions for the website you are visiting. Discover Bank does not guarantee the accuracy of any financial tools that may be available on the website or their applicability to your circumstances. For personal advice regarding your financial situation, please consult with a financial advisor.

Continue