When you deposit your money into a savings account at a bank, the institution will pay you in interest. How much the bank pays can change from month to month.
Why do you earn interest on bank accounts?
To put it simply, when you save your money, the bank wants to use your money to extend loans to other customers. Savings accounts are regarded as “liquid assets”. This is essentially any possession that can be turned into cash on demand. So you can access your funds whenever you want, while also earning some interest.
According to finance site Investopedia:
“Money earns compound interest when the interest earned is added to the original deposit each time it is calculated.”
The more frequently the interest is added to your balance, the faster your savings will grow.
How interest rates on bank accounts work:
Interest rates on bank accounts are usually quoted as a percentage rate per year. When the prime interest rate is low, so are returns from savings accounts.
If you’re looking to earn a lot of interest from your bank account, the first step would be to avoid keeping your money in your current account.
Ordinary transactional accounts offer low interest returns, while there are specific types of savings accounts that offer better interest rates.
High-interest savings accounts are an ideal place to keep your emergency fund or any money to which you still need ready access.
There are different types of bank accounts, all with different interest rates. It’s important that you do your research before opening a bank account, to make sure that it’s the right type of account for your individual needs.
Interest rates on bank accounts can be an incentive to encourage people to save more.