How Does Interest Work on Saving Accounts?

December 20, 2023

High interest rates aren't always a cause for concern; they can also be a benefit, especially for savers. When you have a savings account, high interest rates mean your financial institution pays you more interest, which is one of the most significant benefits of opening a savings account.

A savings account provides you with a secure, insurance-backed place to put cash. In a high-interest environment, the benefits of having a savings account are often even higher. Here’s what you need to know about the role of interest in your savings account.

How interest works for savings accounts

When you borrow money from a bank, you have to pay interest against what you owe. When you open a savings account, a bank is essentially borrowing money from you — meaning they pay you interest in order to hold your cash. Most banks make interest payments monthly, but every bank sets different schedules for when the payments are made.

The amount of interest you receive in your savings account depends on several factors. The most important thing to know is interest rates on savings accounts are often tied to the economy’s performance and the Federal Reserve’s interest rate. They tend to drop when the economy is weaker and the Fed drops interest rates, and they tend to rise in a stronger economy when the Fed’s interest rate is higher.

Can I earn interest on the money I save?

When you open a savings account, you're essentially entering into a partnership with the bank. As you deposit money into your account, the bank puts it to work. Whether they lend it to others or invest it, they generate income. A percentage of this income, known as interest, is then credited to your account, helping your savings grow over time. Although checking accounts sometimes provide interest, you must pick a savings account to ensure you’re earning interest.

Do higher interest rates mean higher yields on savings accounts?

Think of interest rates as the earnings rate on your savings. When interest rates are higher, banks generally pay you more for holding your money with them. This may result in a higher yield on your savings account, providing you with increased returns. Monitoring interest rate movements can be a savvy move for those looking to maximize their savings.

How do I begin earning interest?

Earning interest on your savings is a straightforward process. Start by opening a savings account with a reputable, FDIC-insured bank. Look for accounts that offer competitive interest rates, often referred to as high-yield savings accounts. Once your account is set up, deposit the funds you want to save. The bank takes care of the rest, using your money to generate earnings, and your interest gets deposited into your account on a recurring basis.

Trust Northwest Bank as your financial guide

Understanding interest rates and making the most of your savings doesn't have to be complicated. It’s important to find a bank that does more than give you a place to store your money. Instead, look for a financial partner that’s dedicated to helping you make the most of your savings. Northwest Bank can serve as a trusted advisor to guide you through the intricacies of personal finance and ensure your money works as hard as you do.

As you consider your options, you may especially want to search for a high-yield savings account, where you are set up to earn even more interest than a standard savings account. Not every bank offers high-yield accounts, but those who do, including Northwest Bank, can provide you an especially powerful tool to earn interest.

Savings accounts can be a core part of your financial strategy, providing steady interest that grows as your balance does. To shape your personal approach, consider consulting with a financial expert at Northwest Bank.