Savings Account Interest Rates: Explained
Before you put your money in a CD, traditional savings or money market account, it’s essential to conduct some due diligence. Savings account interest rates and the way they are calculated have a profound impact on how much you can earn. By understanding types of interest and how they work, you’ll be able to make an informed decision about where to put your hard-earned money.
What are Savings Account Interest Rates?
Savings account interest rates are the percentages that credit unions pay depositors on balances. When you leave money in a traditional savings account, CD, money market, or another investment, the financial institution adds to your balance over a set period. If you decide to leave the account untouched, its growth will be calculated on the balance plus acquired interest on a monthly, quarterly, or annual basis.
The money you gain from placing money in savings accounts is considered a fair business practice. That’s because the financial institution relies on your deposits to back the loans it writes. Lenders use a portion of the interest revenue loans generate to help cover operating expenses such as utilities, online banking platforms, cybersecurity, salaries, and building maintenance.
A percentage of the interest taken from the loans and lines of credit is given back to depositors. Credit unions usually offer good savings account interest rates because they do not pay shareholders with that revenue.
How Do You Earn with Savings Accounts?
When deciding where to put your money, it’s important to consider savings account interest rates. The percentage you receive on balances a local institution offers impacts long-term growth.
Let’s say you put $10,000 into a money market account and the annual interest rate is 1.50 percent. After 12 months, you would have earned at least $150 for essentially doing nothing with your money except leaving it in the account. There are also types of interest that cause the balance to grow slightly larger based on the same savings interest rate.
Types of Interest
There are two basic types of interest for depositors to keep in mind — simple and compound. This is what you need to know about them.
If you place your money in an account that provides simple interest, the amount you receive will be proportionate only to the initial balance. Should you decide to invest in a simple interest rate savings account, it’s essential to understand the money you earn will be calculated based on the balance remaining in place for a set period, often 12 months. If the savings account interest rate is 2 percent and the deposit was $5,000, the equation would be: ($5,000) x (2%) = $100.
By contrast, compound savings account interest rates accumulate money each period. Rather than grow once annually, or whatever the complete cycle involves, these accounts apply interest more frequently. By leaving your money in a high-interest savings product untouched, you’ll earn more than one that offers simple savings account interest rates. If your $5,000 earns 2 percent monthly, the more complex equation looks like this: ($5,000) x (1 + 2%)¹² – ($5,000) = $1,341.20.
Important Differences Between APY and Interest
When investing your hard-earned money in a savings product, knowing the difference between APY and interest can make a substantial difference. It’s not uncommon for people to use the terms almost interchangeably. However, they are different.
The acronym APY refers to the Annual Percentage Yield and speaks to the rate of return on your investment. Basically, the APY on an account is the extra money you receive at the end of the cycle, typically one year. In terms of the simple and compound interest calculations, APY is $100 for simple interest or $1,341.20 for monthly compound interest.
It may seem like a subtle distinction, but savings account interest rates do not actually refer to how much extra money you receive. They articulate the percentage you gain by keeping money in a traditional savings account, CD, or money market. Where the important difference resides is how compound interest accrues. As the example above demonstrates, there’s a huge difference between the APY of a simple and compound interest investment.
What is Considered a Good Savings Account Interest Rate?
Determining good savings account interest rates calls for comparing what financial institutions offer. In the case of traditional savings accounts, large corporations often charge depositors fees unless they maintain high balances. This profit-generating mindset also runs through long-term savings investments such as money market accounts and CDs.
Local credit unions generally do not require monthly minimums and offer good savings interest rates. That’s because they do not have to cut stockholders in for a slice of the pie. Credit unions utilize the revenue generated from loans to expand their lending pool and give back to the members. When determining the best savings account interest rate for your family, weigh all the factors and calculate the overall APY.
Maximize Your Savings with Members Plus Credit Union
Understanding the basics of how your savings accounts are earning interest is the first step in making sure you are making the most of your hard earned savings. With just a $5 deposit you can be on your way to reaching your long term financial goals. You can earn dividends and rest easy knowing that there are no monthly fees eating away at your savings. For more information about our savings accounts or if you have any questions about getting started today, please contact us today!
Return to Blog