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Interest rates are more meaningful once you understand how they translate into dollars in your pocket. Running the numbers can tell you how much of a financial gain you can expect when you put your money into any particular account.
Interest can be calculated in two ways: simple interest and compound interest. To calculate simple interest, use the formula a = r * t * p where a is the amount of total interest you will earn, r is the rate, t is the time period, and p is your principal (the account balance). Just remember that percentages are expressed as two (or more) digits past the decimal point (2% is .02, and 2.5% is .025) and when we're talking about an annual interest rate, the time period is one year.
For example, if you have $1,000 in an account that earns 1%, the formula is
a = 0.01 x 1 x 1,000
a = 10 (this is the number of dollars you'll earn)
Simple interest is easy to calculate and can give you a good idea of how much you'll earn. But with a savings account, you'll actually earn a little more. That's because savings accounts pay interest more than once a year. Instead of simple interest, you'll earn compound interest, and that's a better deal for you.
Interest rates on a savings account are calculated more frequently than just once a year. Each time it's calculated, the interest is added to your balance. The next time interest is calculated, you have a bigger principal balance to use in the equation.
Using the same example, let's say that interest is compounded monthly. That means that instead of earning 1% per year, you earn one-twelfth of one percent per month.
a = 0.083 x 1 x 1,000
At the end of one month, you will have $1,000.83.
Now it gets better. In the second month, you will earn the same 1/12% but you get to multiply it by the bigger balance:
a = 0.083 x 1 x 1,000.83
At this point you're already earning interest on your interest. Your balance at the end of month two is $1,001.67, which is one penny more than you would have earned with simple interest on the same amount.
If you leave this money in the bank for 10 years and the rate doesn't change, you will have $1,104.20. Conversely, if you put the money into an account that earns simple interest, the balance will only grow to $1,100 in the same amount of time.
The more money you put into your savings account, the more it matters whether the account pays simple or compound interest. Compounding interest will help you hit each savings goal faster. The vast majority of savings and money market accounts pay compound interest. Some certificates of deposit (CDs) earn simple interest.
Make sure you're getting the best account for you by comparing savings rates and promotions. Here are some of our favorite high-yield savings accounts to consider.
Account | APY | Promotion | Next Steps |
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Open Account for SoFi Checking and Savings
On SoFi's Secure Website.
Rating image, 4.50 out of 5 stars.
4.50/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
|
up to 4.60%²
Rate info
You can earn the maximum APY by having Direct Deposit (no minimum amount required) or by making $5,000 or more in Qualifying Deposits every 30 days. See SoFi Checking and Savings rate sheet at: https://www.sofi.com/legal/banking-rate-sheet.
Min. to earn: $0
|
New customers can earn up to a $300 bonus with qualifying direct deposits!¹
|
Open Account for SoFi Checking and Savings
On SoFi's Secure Website. |
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Open Account for Capital One 360 Performance Savings
On Capital One's Secure Website.
Rating image, 4.00 out of 5 stars.
4.00/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
|
4.25%
Rate info
See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of April 11, 2024. Rates are subject to change at any time before or after account opening.
Min. to earn: $0
|
N/A
|
Open Account for Capital One 360 Performance Savings
On Capital One's Secure Website. |
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Open Account for UFB Portfolio Savings Account
On UFB's Secure Website.
Rating image, 4.00 out of 5 stars.
4.00/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
|
5.15%
Rate info
To ensure you keep getting the highest rate at UFB, you'll need to keep an eye on their rates. Occasionally, the bank launches new accounts with higher rates. Existing accounts need to contact the bank to request being moved to one of these new accounts.
Min. to earn: $0
|
N/A
|
Open Account for UFB Portfolio Savings Account
On UFB's Secure Website. |
When you see the interest rate for a savings account, you'll probably see the letters APY next to the rate. That stands for annual percentage yield. It's a way of showing you how much you'll earn after compounding is taken into account. APY is always a little bit higher than the interest rate. If the APY is 1%, the annual interest rate is about 0.9901%.
You can calculate your savings account APY with the formula APY = (1 + r / n)n where r is the interest rate and n is the number of compounding periods that occur within a year (12 if interest is paid monthly, 365 if interest is paid daily). To calculate APY based on daily compounding, you'll need to use a calculator that can handle high exponents.
Getting a good interest rate on your savings is one of the easiest money challenges you can take on. That's because unlike checking accounts and credit cards, there aren't a lot of bells and whistles to compare on savings accounts. Identify the best savings account and apply. It's your money. Change banks if you qualify for a more lucrative offer.
The essential factors to weigh include:
Saving money is something you can be very proud of. Reward yourself for that effort by finding the account that will make your money work as hard as you do to increase your wealth.
Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. The Ascent's top savings account picks can earn you more than 10x the national average savings account rate.
To calculate the interest you will earn on your savings, use the formula a = r * t * p where a is the amount of interest you will earn, r is the interest rate your bank pays, t is the amount of time that passes each time your financial institution calculates interest, and p is your principal, or the balance in the account.
Banks typically calculate interest either daily or monthly, so divide your interest rate by 365 (daily) or 12 (monthly) and let your time period, t, remain 1.
The best way to maximize interest on your savings is to keep your funds in savings accounts that pay the best rates. You may want to review rates once a year to be sure you're happy with yours. Don't be afraid to change banks if it means a measurable improvement in your bottom line. Changing savings accounts is easy. Open a new account, transfer your money to it, and close the old account. Add funds to your account regularly, and leave the money in the account so that it can earn the most interest possible.
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent, a Motley Fool service, does not cover all offers on the market. The Ascent has a dedicated team of editors and analysts focused on personal finance, and they follow the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands.