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Everyone’s been talking about interest rates lately. When it comes to borrowing money, it’s not great news, but for saving, things are looking pretty good.
The even better news? Today’s top savings accounts offer some of the most competitive interest rates in over a decade. Thanks to those impressive interest rates, the more you save, the more you can earn.
How does interest work?
Your savings account’s interest rate reflects how much a bank or credit union will pay you in exchange for your money. There are two types of interest: simple and compound interest.
Simple interest is calculated on the initial amount you deposit. Suppose you deposit $1,000 into a savings account that pays 5% each year. Each year, you would earn $50 in interest. You can use this simple savings calculator to determine how much interest you could earn.
Compound interest takes into account both the initial deposit and the accumulated interest. Translation: It offers higher earning potential than you’ll find with simple interest.
Using an annual compounding interest rate of 5% per year, after one year, your $1,000 would earn $50 in interest, bringing your total balance to $1,050.
In the second year, your interest is calculated on the initial principal of $1,000 and the $50 earned in the first year. Savings accounts calculate interest either annually, quarterly, monthly, or daily. For example, if your savings account compounded daily, you’d earn $51.27 in interest the first year. That may not sound like much more, but over time, it can add up in a big way.
Here’s how you could earn based on your interest rate
The average savings account interest rate is 0.53% as of August 2023. But various banks offer different rates, ranging from 0.01% to over 5%.
The higher the interest rate, the more you can earn. Let’s explore how different interest rates can affect your earnings.
Here’s a look at how much $1,000 could earn in interest in one year, assuming daily compounding interest.
| Interest rate | Total interest earned | Total balance |
|---|---|---|
| 1% | $10.05 | $1,010.05 |
| 2% | $20.20 | $1,020.20 |
| 3% | $30.45 | $1,030.45 |
| 4% | $40.81 | $1,040.81 |
| 5% | $51.27 | $1,051.27 |
This may not look like a big difference initially. But over time, compounding interest can play a significant role in growing your savings.
Using the same $1,000, here’s how much interest it could earn over time in an account earning 1% interest.
| Years of saving | Total interest earned | Total balance |
|---|---|---|
| 5 years | $51.27 | $1,051.27 |
| 10 years | $105.17 | $1,105.17 |
| 15 years | $161.83 | $1,161.83 |
| 20 years | $221.40 | $1,221.40 |
When compared to a savings account earning 5% interest:
| Years of saving | Total interest earned | Total balance |
|---|---|---|
| 5 years | $284.00 | $1,284.00 |
| 10 years | $648.66 | $1,648.66 |
| 15 years | $1,116.89 | $2,116.89 |
| 20 years | $1,718.10 | $2,718.10 |
Even small variations in interest rates can have a significant impact on your earnings over time. That’s why it’s important to consider the interest rate when choosing a savings account.
When should I start saving?
The ideal time to start saving is as soon as possible. The sooner you get in the habit of putting money away, the better off you’ll be for the future.
Your savings can cover unexpected expenses or emergencies. Saving early allows you to build a solid financial cushion over time.
Plus, compound interest works best when given time to grow. By starting early, you allow your savings to accumulate interest and generate more earnings over the long term.
It’s never too late to start saving. Being consistent with your savings can have a significant impact on your financial well-being in the long run.
It’s not just about establishing a good habit, either. By starting to save at a young age, you’ll get the benefit of compounding for a much longer period of time.
How to earn more interest on your savings
Ready to level up your savings? First, remember the importance of time. You probably aren’t going to earn buckets of interest in a low-risk savings account in just a year, but over time, those earnings can really start to add up.
Second, don’t settle for average, especially regarding savings account interest rates. The best rates likely aren’t in traditional savings accounts. Instead, you’ll find them on high-yield savings accounts or something similar.
“There is a major reward for shopping around to compare rates,” says Ted Rossman, senior industry analyst at Bankrate. “The average rate for a savings account is a measly 0.53%, which is far lower than the top-yielding accounts.”
As long as the financial institution is FDIC insured, says Rossman, there’s no harm in picking a smaller bank or one you haven’t previously heard of, especially if it comes with a higher rate.
Here are different types of accounts to look at:
- High-yield savings account: The best high-yield accounts offer the most competitive interest rates. Take the time to research and compare options.
- Online banks: Online banks have lower overhead costs than traditional brick-and-mortar banks. As a result, they can often offer higher interest rates on their savings accounts.
- Certificates of deposit (CDs): CDs also offer higher interest rates than regular savings accounts. The catch is that you can’t withdraw the money for a specified period, ranging from a few months to several years — so make sure your CD’s term aligns with your financial goals.
- Money market accounts: Money market accounts combine the features of savings and checking accounts, offering higher interest rates while still providing some liquidity.
Lastly, try to increase your savings contributions. Interest alone may not be enough to move the needle in your finances. Regular savings deposits can kick your account’s growth into high gear.
By consistently saving more, you’ll have a larger principal amount on which the interest is calculated, leading to higher overall earnings. Here’s how much interest you could earn on $1,000, with additional monthly contributions, in just one year, assuming a 5% interest rate.
| Additional monthly contribution | Total interest earned | Total balance |
|---|---|---|
| $0 | $51.27 | $1,051.27 |
| $25 | $58.87 | $1,358.87 |
| $50 | $66.48 | $1,666.48 |
| $75 | $74.08 | $1,974.08 |
| $100 | $81.69 | $2,281.69 |
How to save for long-term success
Saving for the future requires planning and smart financial habits. Here are some strategies to help you save effectively:
- Set a clear goal: Define your long-term objectives, like building an emergency fund, saving for retirement, or buying a home.
- Create a budget: Develop a realistic spending plan that includes income, expenses, and savings goals. Track your spending and identify areas where you can cut back or make adjustments.
- Automate your savings: Set up automatic transfers from your checking account to your dedicated savings account, so you don’t forget.
- Reduce unnecessary expenses: Evaluate your expenses and identify areas where you can cut back, including things like dining out, entertainment costs, or subscriptions.
- Prioritize paying off debt: High-interest debt can keep you from saving. Make sure you have some savings to cover you if something happens, and then allocate your extra funds towards paying off debts, starting with those with the highest interest rates. Once debts are cleared, redirect those funds toward savings.
- Adjust as needed: Regularly review your finances and savings plan to ensure you’re on track. Your goals and priorities may evolve over time, requiring changes to your saving strategy.
The bottom line
Earning interest is a free and easy way to make money — especially with today’s competitive interest rates
Don’t just deposit your money anywhere, though. Compare banks and different types of savings accounts to find an account where your balance can grow.
Opinions expressed are author’s alone, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any of the entities included in the post.
