How to Calculate Interest on Your Savings Account: A Handy Guide
Using money to make more money can be an efficient and effective way to help generate more earnings. You have limited hours and energy each day to commit to your job. Finding ways to save and invest your hard-earned money can help maximize your returns as you work toward your financial goals.
Finding the right accounts to keep your hard-earned money may be challenging, depending on your needs. It depends on your risk tolerance, timeline, short and long-term goals, and financial situation. Each type of account may have different features and perks that help you create a well-rounded portfolio that can help to improve your financial security, freedom, and resiliency.
A savings account is a popular choice for short-term savings goals and emergency funds. It’s one of the basic accounts that can help maximize your savings. You earn interest, which grows your savings. This guide explores how to calculate interest on your savings account so you can estimate how much you’ll earn.
What is a savings account, and how does it work?
A savings account is a type of account that earns intereston deposits. The interest you earn depends on the compounding frequency and interest rate the financial services provider offers. For example, the provider may offer 4.00% interest calculated daily on the total closing balance and pay the interest monthly. The interest rate is typically expressed as an annual percentage. Each financial provider sets an interest rate based on economic factors such as the financial markets, the Bank of Canada’s policy interest rate, and competitor rates.
Savings accounts pay out interest based on how much money you keep in your account. You have your principal, plus any interest earned on money in the account that has compounded. Your principal is the amount of money you deposit in the account. The financial services provider pays interest in your account based on the compounding period, such as annually, semiannually, quarterly, or monthly.
Some savings accounts have no monthly fees or minimum balance requirements. You can deposit any amount of money, which all goes into your savings. Some accounts may have additional perks like cashback and referral bonuses. You can compare savings accounts online to learn about the features of different accounts.
It’s important to distinguish between ongoing and promotional interest rates. Ongoing rates never expire, while promotional rates (also called welcome offers) only apply for a specified period of time. After the promotional interest rate expires, the regular rate is typically much lower. However, some savings accounts have higher-than-average ongoing rates. You can typically find these higher ongoing rates at online financial services providers.
Accessing your savings account
You can access your savings account by logging into the financial services provider’s website or mobile app with your account information. If you have a savings account with a traditional bank, you can also access it by visiting your local branch. Many online provider’s have digital application forms you can complete from the comfort of your home. Once they approve your application, you can begin depositing money into your savings account.
Savings accounts offer flexibility to allocate money based on your financial situation and goals, and the flexibility and accessibility to withdraw money if you need it.
What is the difference between simple interest vs. compound interest?
Simple interest and compound interest are important concepts in the finance world. Whether you’re borrowing or lending money, you’ll likely encounter one of these terms.
Simple interest
Simple interest considers the principal amount only when calculating how much you pay or earn. You can easily estimate simple interest by multiplying the interest rate with your principal and timeline. Let’s say you get 4.00% simple interest and deposit $10,000 into your savings account. Using the simple interest formula, you’ll have $400 in interest at the end of one year. After two years, you’ll have accumulated $800 in interest earnings.
Compound interest
Compound interest is calculated on your principal balance and any interest accumulated from previous periods. The financial provider calculates interest based on the compounding period, which is then added to your account balance at the end of the billing cycle.
Using the same simple interest example above, you have $10,000 in your account and earn 4.00% daily compounded interest. You accumulate $5.48 at the end of a month and can reinvest it into your savings so it’s considered a part of your principal when calculating your interest earnings in the next month. Since interest for the next month is calculated based on a higher principal, your interest earnings accelerate monthly and you earn $408.08 at the end of the year.
Let’s say you get 4.00% simple interest and deposit $10,000 into your savings account. Using the simple interest formula, you’ll have $400 in interest at the end of one year. After two years, you’ll have accumulated $800 in interest earnings.
The compounding periods can be daily, monthly, quarterly, semi-annually, or annually. Daily compounding means the financial services provider calculates your interest earnings each day based on the closing balance of your account. You can see the interest you earn by logging into your savings account.
What are the benefits of compounding interest?
Compound interesthelps maximize savings since future interest payments are calculated based on your principal and interest earned, meaning your funds grow faster than with simple interest. Faster money growth means you can reach your financial goals more quickly.
If you put money in a high-interest savings account (HISA), this type of account typically has a higher interest rate than a standard savings account. A HISA may have an interest rate of 4.00%, while a traditional savings account may offer a rate of less than 1.00%.
You don’t need a lot of money to take advantage of the snowball effect of compound interest. You can start with a small amount and gradually increase your savings by consistently depositing into your account. Your funds can grow over time with discipline and good savings habits.
How to increase your savings?
A cash reserve can help give you more freedom and security to choose and pursue different opportunities and experiences. You also have a safety net in emergencies to help prevent deep financial troubles. Here are some ways to help increase your savings.
Choose your savings account wisely
Finding a savings account to deposit your money can help give you a secure place to park your funds, and you may be able to leverage the perks and features offered to maximize your savings. It can be hard to choose a savings account because there are many financial services providers and options available. Choosing the right account for your situation can help you reach your goals.
Comparing savings accounts is a great way to research the options available. You can research different rates and features to ensure you open an account that matches your needs well. With the rise of online financial services providers, many accounts have platforms and apps that provide insights into your financial habits.
Frequently deposit money
You don’t necessarily need a lot of money to start saving. Making frequent deposits into your savings account helps build good habits. Even if you can only deposit $10 each month right now, that $10 can add up over time, and the compound interest will also help your savings grow. Consider slowly increasing your deposit amount once you can comfortably save $10.
Automating your savings is a great way to ensure you make regular deposits into your savings account. You can choose an amount, date, and frequency to deposit money into your account. For example, you can schedule an automated transfer on payday to deposit $100 from every paycheque into your savings account. This helps you be able to set aside money for your savings goals without being tempted to spend it.
How to earn more interest in a savings account
Making regular deposits and increasing the amount of money in your savings account is one way to earn more interest. The more money you deposit, the higher your principal will be when calculating the compound interest you earn, which equals higher interest payments. The higher interest payments can be reinvested into your savings account to generate more interest in the future. This cyclical pattern accelerates your savings growth with every compounding period.
If you’re looking to grow your savings quickly, a HISA may be a good choice. For example, a regular savings account may offer a 1.00% interest rate, while the Neo High-Interest Savings account offers 4.00%¹. You also typically receive more interest with each compounding period than with the traditional account.
The Neo High-Interest Savings account is a great option to consider for your savings. It offers one of the highest interest rates in Canada², ensuring your money works hard to help accelerate your savings. The Neo High-Interest Savings account offers security and accessibility and is eligible for deposit protection from the Canada Deposit Insurance Corporation (CDIC)³.
You can open multiple accounts dedicated to different savings goals and use the built-in tools to set targets and monitor your progress. The smart tools provide insights into your savings habits and keep you on track to help you reach your goals. With no monthly fees or minimum balance requirements, the Neo High-Interest Savings account is a great option.
Learn more about the Neo High-Interest Savings account and start earning more today!
This article provides information and is not intended to provide any personalized tax, investment, financial, or legal advice. You are encouraged to seek professional advice before making financial decisions.
¹ Interest is calculated daily on the total closing balance and paid monthly. Rates are per annum and subject to change without notice.
² Based on research of high-interest savings accounts, comparing and limited to: BMO, CIBC, Scotiabank, TD Bank, RBC, Simplii Financial, and Tangerine. Research conducted by Neo Financial and based on data taken from public websites on January 4, 2024. Research excludes welcome offers.
³ The Neo High-Interest Savings account is provided by Peoples Bank of Canada, a CDIC member institution, and is eligible for CDIC deposit protection. Deposits held in Neo High-Interest Savings accounts are combined with eligible deposits held at Peoples Bank of Canada, for up to $100,000 of deposit protection, per category, per depositor. For more information about CDIC deposit insurance, please consult CDIC’s website cdic.ca.
