How Does an Interest Bearing Account Work?

How Does an Interest Bearing Account Work?

Setting up a savings account is one of the first things you should do if you're attempting to get your finances in order. There are several advantages to having a savings account, like having an emergency fund for unforeseen bills and saving for a down payment on a home. Regardless of your motives for saving, an interest-bearing account is one of the finest ways to do so. Instead of stuffing enormous sums of money under your mattress or leaving it in non-interest-bearing accounts, let your money grow by depositing it in an account that pays interest!

What is an interest-bearing account?

An interest-bearing account is one in which you are paid interest on the money you deposit. You are essentially compensated for keeping your money in one location. You might wonder why. This is because the bank utilizes the money you deposit in a savings account to either create investments or provide loans to other customers. Then, from their revenues, they pay you interest. Whether you open a conventional savings account or a high-yield account, this is true.

Different types of interest-bearing accounts

Even though most savings accounts generate interest, not all of them are created equal. A high-yield savings account, for example, often pays a greater interest rate than an ordinary savings account. The most popular interest-earning accounts are shown below. Savings accounts, high-yield online savings accounts, money market accounts, and Certificates of Deposit are just some of the options. Your optimal savings account will be determined by your timeframe, goals, and administrative requirements. Keep in mind that the current national interest rates are set by the Federal Reserve. The Federal Open Market Committee (FOMC), as it is officially known, is made up of members of the Federal Reserve Board and the Federal Reserve Bank. 1. Interest-bearing checking accounts Checking accounts are typically non-interest bearing, however, some now pay interest on your balance. Banks began offering interest-bearing checking accounts as a way to persuade consumers to keep their money with them rather than put it in other savings accounts. These accounts have low-interest rates, however, they may be comparable to or identical to those offered by some savings accounts. Customers get the best of both worlds by having a debit card, unlimited transactions, and interest payments all in one place. Some interest-bearing checking accounts offer a fixed monthly interest rate regardless of your balance. Furthermore, some accounts provide higher interest rates once you reach a particular sum. But, as always, be aware of the interest-bearing checking account's costs. Because you may be spending more to gain a small amount of interest if the fees are too high. You could be better off using a free non-interest-bearing account for your daily spending and depositing the remainder of your money in one of the accounts listed below.

2. Regular savings account

The most prevalent type of interest-bearing deposit account is a normal savings account. It's a savings account where you keep money that you don't need for monthly bills and everyday transactions, such as an emergency reserve. Traditional banks, online banks, and credit unions all make it simple to open a new account. They're convenient since money can be transferred in and out quickly. It can be linked to the ATM card associated with your bank account for quick balance transfers and direct deposits. The US government likewise restricts savings account withdrawals to six per month. When looking at savings account possibilities, keep in mind your bank's policies in this regard. A penalty fee is routinely charged by most banks. However, if you withdraw more than six times each month, your bank may terminate your account or convert it to a checking account.

3. High yield savings account

Because they provide larger interest rates than normal savings accounts, high-yield savings accounts have been popular in recent years. Despite the moniker "high yield," interest rates have not been particularly high in recent years. Remember that these rates fluctuate depending on the economy and individual institutions. Traditional banks, credit unions, and online banks all offer high-yield accounts. However, internet banks may have better interest rates and lower costs than their physical equivalents. They can do so because they have lower operational costs than traditional banks. As a result, most online banks do not charge monthly maintenance or minimum balance fees. Some don't even require an initial deposit or a minimum balance. When shopping for a high-yield savings account, keep these factors in mind. Who wouldn't want to receive a better rate while simultaneously saving money on fees?

4. Money market account (MMA)

A money market deposit account is a fantastic alternative if you wish to deposit a significant sum of money and won't require access to it for a long time. They come with checking account features like check writing and debit card usage. To start a money market account, you will often need to deposit a large sum of money. This is how you will be able to take advantage of the higher interest rates. This is the greatest option if you already have some money set aside. Just keep in mind that if you deposit less than the legal minimum, certain banks may charge you a fee.

5. Certificate of deposit (CD)

A certificate of deposit, sometimes known as a CD, has the greatest interest rate. To earn a higher interest rate, you must often maintain your money in your account for a much longer amount of time. You will not be able to withdraw funds during this time. You must deposit a particular amount into the CD, just as you must with a money market account. The initial deposit can be anywhere from $200 to $10,000. A CD might last anywhere from a few months to several years. This is an excellent choice for long-term planning.

What fees to expect with interest-bearing accounts?

When you open an interest-bearing account, be prepared to pay some fees. Make sure you check these ahead of time so you don't get any unpleasant shocks when checking your monthly balance or trying to withdraw money.

Maintenance fees

Some accounts demand a monthly or annual fee to maintain and keep the account open.

Account minimum fees

If you do not maintain the required minimum balance, you may be charged.

Withdrawal fees

Depending on the accounts, you may be charged a fee or receive penalties if you attempt to withdraw funds.

Are interest-bearing accounts FDIC insured?

The answer is contingent on the amount of money in the account and whether the bank with which you opened the account is an FDIC member. So, before you open an account with any bank, be sure it's a member of the FDIC. In the event of a bank failure, the Federal Deposit Insurance Corporation offers federal insurance. For each account category, the typical insurance amount is $250,000 per depositor, per insured bank. You are not required to get deposit insurance. If you open a deposit account with an FDIC-insured bank, you are automatically covered. (Member FDIC is usually stated on bank websites.) If you're creating an account with a credit union, though, be sure it's a member of the NCUA. The National Credit Union Association ensures the credit union system's safety and soundness.

What are the benefits of interest-bearing accounts?

You should open an interest-bearing account for a variety of reasons. You will not only earn money from your savings, but you will also be able to keep it in a secure location where you will not be tempted to squander it. It's usually a good idea to save money, and keeping one or many interest-bearing accounts is even better. You're just getting started with your finances and want to use an online bank to save some money? Have some longer-term objectives in mind and want to listen to a CD? Interest-bearing accounts may hold the key to growing your money.

How is the interest calculated on an interest-bearing account?

Interest rates differ depending on the type of account into which you deposit your funds. Compound interest is used in savings accounts, where the principal and all accumulated interest are considered. The annual percentage yield is commonly used to compute this interest (APY). This is the total amount of money earned in a year, including compound interest. The amount you earn is determined by the type of account you have. If the account is compounded, you will earn different rates. The interest on your initial contribution, plus any interest you've already earned, is referred to as compounding. Interest is compounded on a daily, monthly, quarterly, or annual basis. If your account just pays simple interest, you'll only get a certain percentage of the money you put in each year. Similarly, whether you have a fixed or variable rate, your account will receive a varied return. Of course, your total return will be influenced by the amount of money in your account, to begin with.

Want to determine how much you'll earn? Use an interest-bearing account calculator!

There are a few things to consider before putting your money into an interest-bearing account. Do you wish to make a one-time deposit or make monthly contributions to the account? How frequently would you like to withdraw funds? You can use an interest-bearing account calculator to see how much money you can make in a year in a high-yield savings account.

How to use the interest-bearing account calculator

The savings calculator will show you how much money you can save over time. You'll need to enter the following information:

1. Starting balance

This is the amount you intend to deposit when you open the account.

2. Monthly contributions

This is an optional field that pertains to the monthly deposit amount.

3. Time to grow

This is the amount of time you intend to keep the money in your savings account without making a withdrawal. You can choose to put in a specific amount of years or months.

4. Annual interest rate

Enter the bank's current interest rate or the interest rate you intend to earn. If you're saving in a non-interest-bearing account, you can also put zero.

The best Interest-bearing account calculators to use

Using the calculator with a monthly deposit is one method to see how even tiny sums saved each month may grow. Then, for comparison, try again with a $25 or $50 monthly deposit.


You can use's Savings Goal Calculator to estimate how much money you'll need to save each month to meet your savings goal.

2. Bankrate

To figure out how much interest you'll receive on your investments, such as your IRA and savings accounts, use Bankrate's Simple Savings Calculator. If you're saving for a wedding or a down payment on a home, you can use the calculator to figure out how much you need to put aside each month to meet your goal.

3. Marcus by Goldman Sachs

To see how much interest you may make with a high-yield savings account, use Marcus' Savings Account Calculator.


Calculate how much money you'll have when you decide to withdraw your savings using this interest-bearing account calculator from It is more complicated since it takes into account extra considerations such as taxes and inflation. If you're placing money in a non-interest-bearing account, you can even increase your monthly deposits or calculate a zero interest rate.

Grow your money faster with interest-bearing accounts

When it comes to saving money, every dollar matters, whether it's $5 or $500. Don't throw money away by not taking advantage of interest-bearing accounts. Although it may not appear to be much, even tiny sums of interest should not be overlooked. Interest can help your money develop and with the power of compounding it will grow into a huge deal over time! You'll also reach your savings objectives faster!

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