Easy Money: How Savings Accounts Earn Interest
When it comes to saving money, the aptly named savings account remains one of the safest and most popular avenues for Americans wanting to stow away cash.
Money invested in federally insured savings accounts are secure, protected from the whims of the economy and swings of the stock market. They’re not the main course of a retirement plan, but savings accounts continue to be utilized across the country as a reliable and easily accessible emergency fund.
How Savings Accounts Earn Interest
At its simplest, "interest" is free money.
Here's how it works: When you put $100 into a savings account, you'll earn interest on that money. Different financial institutions pay interest at different times, some annually, most quarterly or monthly. At Georgia Heritage, we pay a 1% interest rate that's compounded on a monthly basis.
- Simple Interest: A $1,000 balance earning 1% interest per year will net $10 in interest. (This is called simple interest.)
- Compound Interest: For an account paying quarterly interest, that 1% is divided into four payments every three months and paid on the original $1,000 balance. After the first quarter, you earn one quarter of 1% on $1,000, or $2.50. The second quarter balance is then $1,002.50, to which another quarter percent interest is applied. This results in a third quarter balance of $1,005 and some change, and a year-end balance of $1,010.05. This is called compound interest, where interest is applied to the principal, increasing your principal every quarter.
This may not seem like much, and in a year’s time it's not exactly a winning lottery ticket, but savings accounts are long-game investment strategies. Add a $30 monthly contribution after your initial $1,000 and your year-end balance jumps to $1,371.70, $2,896.22 after five years, and $4,889.62 after ten. Bump your monthly $30 to $50, and you're looking at $7,412.62 after ten years, including more than $400 in interest payments.
That’s $400 in free money! And it's money you wouldn't earn by stowing your rainy day cash in the sock drawer.
Contact Our Credit Union to Learn More
For more information about how savings accounts earn interest, or to start saving toward your future with monthly dividends and auto-deposits, contact us today.
You may also head over to our free online calculator to see how much you can be earning with as little as $5 to start!