A savings account is a safe and easy way to save. Like a checking account, you can deposit and withdraw money at any time. In return for keeping your money at the bank, the bank pays you money, which is called interest. In other words, you make money by saving money. Understanding how interest works can have a huge impact on your financial success.
Why does the bank pay you interest? As you may have learned in a previous module, one of the primary ways that banks make money is by making loans. When you deposit money in your savings account, the bank lends it out and charges interest. They use the money they make from those loans to pay you interest, but they wouldn't have any money to lend if it wasn't for you and other depositors.
How Much Interest Will You Earn?
Every month when you look at your statement, you'll see how much interest you earned on your savings. How much interest will you earn? That number varies over time and by bank, so you'll want to shop around for the best rate when you set up an account.
No matter what the interest rate is or how it's calculated, the longer your money remains in the account, the more you'll make.
Compound vs. Simple Interest
In another module we looked at the difference between simple and compound interest. Here's a quick reminder.
Compound Interest
Bank pays interest on your original deposit (principal) and any interest you have earned.
Simple Interest
Bank pays interest on your original deposite (principal) but NOT on any interest you have earned.
Let’s take a look at what interest will actually do for your account. Using this spreadsheet, you will examine how interest adds up quickly to help your money grow. Download the spreadsheet before you start the interactivity. Then, click the player button to begin.