What we'll cover
How interest rates on your savings account works
The difference between simple and compound interest
Considerations for maximizing your savings and interest
The financial advice we’re all given from a young age? Save money.
Depositing cash into a savings account is a savvy move because it allows you to set aside money for a larger purchase like a family trip or redecorating your family room and it’s available in case of an emergency. Interest earned on the account helps you build upon your savings without any added effort. We’ve got all you need to know about how interest works, how to calculate your interest, and how to maximize interest earned for even greater savings.
What is interest on a savings account?
When you deposit your money in a savings account, the bank pays you interest for keeping those funds in the account. The more you deposit, the more interest you can earn. Your interest earnings also increase the longer you leave the funds deposited in your savings account.
Current interest rates typically fall between 1-5%, depending on the type of deposit account.
Learn more about Ally Bank’s Savings Account.
Simple vs. compounding interest
There are two types of interest you may earn on your savings: simple or compound.
Simple interest is interest paid only on the principal funds — the funds you deposit into the account yourself. For example, if you put $1,000 into your account, interest is always based on that amount.
When you earn compound interest, you receive interest on both your deposit and the accumulated interest you’ve already earned. Compound interest builds up your savings faster and enables you to save more in the long term.
Compound interest builds up your savings faster and enables you to save more in the long term.
How to calculate interest in a savings account
To determine how much savings interest you will earn, you want to pay attention to the annual percentage yield, or APY. This is the rate of interest earned on a deposit over a year. And yes, the higher your APY, the better.
It’s easy to calculate simple interest. Multiply your principal amount by the interest rate (expressed as a decimal) by the amount of time the money is in the account, typically expressed as one year.
Compounding interest can multiply daily, weekly, monthly or quarterly (depending on the bank and specific account type), so it can be more complicated to determine. Multiply the principal amount by the interest rate to the number of compound periods, then subtract the principal:
Maximize how much interest you earn
Want to see your savings grow faster? Here are some ways to maximize your savings opportunities.
Choose a savings account with a high interest rate
Choose a savings account with interest compounded daily
Choose a savings account with no monthly fees
Set a deposit schedule and commit to it
Use a savings account to reach your goals
Remember, the more you save, the faster your savings grows. It all starts with opening the right account and regularly depositing funds. But it’s also beneficial to explore additional ways to save, including our buckets and boosters. Once you achieve your savings goals, you can treat yourself or gain peace of mind knowing that your emergency fund is fully funded.
