Most people know their savings account earns “some interest”, but few know how it is worked out. Understanding the maths helps you compare accounts and see how much your money really grows.
Interest is usually calculated daily
Most banks calculate interest on your balance at the end of each day, then add (credit) the total to your account every month or quarter. Once it is credited, that interest starts earning interest too. This is called compounding.
The formula
For each day: Daily interest = Day’s balance × Annual rate ÷ 365
The bank adds up the daily amounts over the month or quarter and pays the total.
Worked example
Suppose your account pays 3% a year. In a 30-day month:
- Days 1–10: balance $4,000 → 4,000 × 3% ÷ 365 × 10 = $3.29
- Days 11–20: balance $10,000 (salary paid in) → 10,000 × 3% ÷ 365 × 10 = $8.22
- Days 21–30: balance $6,000 → 6,000 × 3% ÷ 365 × 10 = $4.93
Interest for the month: about $16.44.
Rate vs APY
The interest rate is the simple yearly rate. The APY (annual percentage yield, called AER in some countries) includes the effect of compounding, so it shows what you actually earn in a year. A 3% rate compounded monthly gives an APY of about 3.04%. When comparing accounts, compare the APY.
Watch for these details
- Tiered rates: some accounts pay a higher rate only on balances above a certain amount, or only up to a limit.
- Introductory bonuses: a high rate may last only a few months before dropping.
- Conditions: some accounts require a monthly deposit or limit withdrawals to pay the top rate.
- Fees: a monthly fee can cancel out the interest on a small balance.
Tax on interest
In many countries, savings interest is taxable income, though some offer a tax-free allowance or special tax-free savings accounts. Check the rules where you live, and remember that tax reduces your real return.
How to compare savings accounts
- The APY on the balance you will actually keep.
- How long the rate is guaranteed.
- Minimum balance rules and fees.
- Withdrawal limits and how quickly you can access money.
- Deposit insurance: make sure the bank is covered by your country’s deposit protection scheme.
Savings account or fixed deposit?
Keep three to six months of expenses in an easy-access savings account as an emergency fund. Money you won’t need for a year or more may earn more in a fixed deposit or another higher-yield option.
Rates change often and differ between banks. Check current rates before choosing an account. This article is general information, not financial advice.