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Interest from Savings

By: EconomyWatch Date: 14 October 2010

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Savings interest is received by an individual on the cash deposited in his/her savings bank account. The bank interest rate offered on the savings account is generally modest and usually lower than that offered on certificates of deposit (COD) and Treasury bills. Despite this, the savings account remains the choice of many, as it is very convenient to open and operate and has a very low risk profile. People simply need to maintain the minimum cash balance in the savings account, and wait for interest to accrue periodically.

Understanding Savings Interest

Savings interest rates are dependent on the fed funds rate and the prime rate. The Fed funds rate is the interest rate at which financial and banking institutions provide loans to each other. Banks need to take loans from other financial institutes to maintain the minimum amount of reserves with the central bank. The lower the Fed funds rate, the lower the savings interest.

The prime rate is the minimum interest rate that a bank offers to its most creditworthy clients. Since the prime rate is the benchmark interest rate for a bank, it helps in determining other interest rates, including savings interest rates. When prime rates are low, savings interest rates are also low.

Banks determine savings interest rates on an annual basis. However, this does not mean that the savings accountholder will receive interest only once a year. Bank interests are compounded weekly, monthly or yearly, based on the type of account and the policies of the bank.

The interest accumulated on the deposit is either added to the cash balance in the account or paid to the accountholder separately.

Types of Savings Interest Rates

Savings interest rates can be fixed or variable. In a fixed savings account, bank interest rates remain unchanged over a specific period. Although fixed interest rates are low, it guarantees uniformity.

Savings accounts with variable bank interest rates are called money market accounts. The interest on such savings accounts can vary periodically depending on the market situation. However, the rate of interest remains the same over a specified period, such as daily, weekly or monthly.

An individual can look for banks that offer the maximum savings interest rates. To maximize the interest amount, people can maintain high cash balances in the account and negotiate higher savings interest rates. Banks usually offer higher interest rates to their best customers.