When you put money into a savings account, your bank or financial institution will reward you with a percentage of the money saved in return for keeping your money with them. This is called interest.
Interest helps to make your savings grow. The higher the interest rate that your savings attract, the faster those savings will grow. Look for accounts offering an interest rate that's higher than the rate of inflation, where available, which is the rate at which the prices of goods and services increase. Otherwise, the real value of your savings may decrease. And remember, you may have to pay tax on the interest you earn.
Choosing the right savings option often requires a balancing act between the interest rate offered, and the terms and features it comes with. For example, savings accounts offering higher interest rates may require you to:
By contrast, a flexible savings account, offering instant access, is likely to offer a lower interest rate.
Where you choose to deposit your savings will depend on what you're saving for. If you're building an emergency savings fund, for example, you'll probably want immediate access to your money, and so an account offering instant access would be important. However, if you're saving toward a deposit for a house, an account offering higher interest, but which requires giving notice to access your savings, may be a better option.
Compound interest is interest earned on previously earned interest. The longer you save, the more the interest you earn compounds. Compound interest quickly mounts up, and can significantly increase your savings over time.
Here’s an example:
Let’s say you make a regular deposit of $50 each month (that’s $1,200 over a year) into a savings account, earning 3% interest annually. After one year, you'll earn $9.71 interest. By the end of the third year, however, you have $84.55 in interest, because you earn interest on the total balance (that already includes interest earned in the first two years).
| Year | Total Deposits | Year Interest | Total Interest | Balance |
|---|---|---|---|---|
| 1 | $600.00 | $9.71 | $9.71 | $609.71 |
| 2 | $1,200.00 | $28.00 | $37.71 | $1,237.71 |
| 3 | $1,800.00 | $46.84 | $84.55 | $1,884.55 |
| 4 | $2,400.00 | $66.24 | $150.79 | $2,550.79 |
| 5 | $3,000.00 | $86.23 | $237.02 | $3,237.02 |
| 6 | $3,600.00 | $106.82 | $343.84 | $3,943.84 |
| 7 | $4,200.00 | $128.02 | $471.86 | $4,671.86 |
| 8 | $4,800.00 | $149.86 | $621.72 | $5,421.72 |
| 9 | $5,400.00 | $172.36 | $794.08 | $6,194.08 |
| 10 | $6,000.00 | $195.53 | $989.61 | $6,989.61 |
| Year | 1 | 1 |
|---|---|---|
| Total Deposits | $600.00 | $600.00 |
| Year Interest | $9.71 | $9.71 |
| Total Interest | $9.71 | $9.71 |
| Balance | $609.71 | $609.71 |
| Year | 2 | 2 |
| Total Deposits | $1,200.00 | $1,200.00 |
| Year Interest | $28.00 | $28.00 |
| Total Interest | $37.71 | $37.71 |
| Balance | $1,237.71 | $1,237.71 |
| Year | 3 | 3 |
| Total Deposits | $1,800.00 | $1,800.00 |
| Year Interest | $46.84 | $46.84 |
| Total Interest | $84.55 | $84.55 |
| Balance | $1,884.55 | $1,884.55 |
| Year | 4 | 4 |
| Total Deposits | $2,400.00 | $2,400.00 |
| Year Interest | $66.24 | $66.24 |
| Total Interest | $150.79 | $150.79 |
| Balance | $2,550.79 | $2,550.79 |
| Year | 5 | 5 |
| Total Deposits | $3,000.00 | $3,000.00 |
| Year Interest | $86.23 | $86.23 |
| Total Interest | $237.02 | $237.02 |
| Balance | $3,237.02 | $3,237.02 |
| Year | 6 | 6 |
| Total Deposits | $3,600.00 | $3,600.00 |
| Year Interest | $106.82 | $106.82 |
| Total Interest | $343.84 | $343.84 |
| Balance | $3,943.84 | $3,943.84 |
| Year | 7 | 7 |
| Total Deposits | $4,200.00 | $4,200.00 |
| Year Interest | $128.02 | $128.02 |
| Total Interest | $471.86 | $471.86 |
| Balance | $4,671.86 | $4,671.86 |
| Year | 8 | 8 |
| Total Deposits | $4,800.00 | $4,800.00 |
| Year Interest | $149.86 | $149.86 |
| Total Interest | $621.72 | $621.72 |
| Balance | $5,421.72 | $5,421.72 |
| Year | 9 | 9 |
| Total Deposits | $5,400.00 | $5,400.00 |
| Year Interest | $172.36 | $172.36 |
| Total Interest | $794.08 | $794.08 |
| Balance | $6,194.08 | $6,194.08 |
| Year | 10 | 10 |
| Total Deposits | $6,000.00 | $6,000.00 |
| Year Interest | $195.53 | $195.53 |
| Total Interest | $989.61 | $989.61 |
| Balance | $6,989.61 | $6,989.61 |
The earlier you start saving, the more time you have to earn compound interest. It’s a good idea to make regular deposits, if you can, to keep your money growing. It’s also best to avoid taking money out of your savings account as that reduces the amount of interest you’re earning.
