## Savings Interest Rates

There's a reason why people put their money in a savings account instead of a standard transaction account: savings accounts earn interest. To give you a better idea on how interest works, we've put together a primer below.

### What is interest?

Interest is a fee paid at a specific rate for the use of money on loan, or for delaying the repayment of a debt. In the case of savings accounts, the bank or credit union pays the account holder interest for keeping the money deposited in the institution. Interest is usually paid to the lender (or account holder) as a percentage of the total money lent or invested; this is called interest rate.

Interest is usually compounded, which means the interest is calculated not only with the amount deposited, but also with the interest that the deposited amount already earned.

### How is interest calculated

When it comes to savings accounts, interest is typically expressed yearly, monthly, and daily. As mentioned earlier, interest is usually compounded, especially in savings accounts. To calculate your account's annual profit, multiply your initial deposit by the account's interest rate. If your initial deposit of \$5,000 has an interest rate of 4.25 per cent p.a., your account would earn \$212.50 in a year (\$5,000 x 0.0425).

To find out how much your account earns daily, divide its annual profit by 365 days (366 for leap years). Using the same example, the annual profit of \$212.50 would earn \$0.58 daily in a regular year. But since most banks and credit unions calculate interest daily and pay monthly, your account will instead receive \$17.4 in a 30-day month. This means your balance on the first month will be \$5,017.40.

Since banks and credit unions use compounded interest, your account will earn interest based on the money deposited, plus any interest it previously earned. Therefore, the same 4.25 per cent p.a. would be multiplied to the new balance of \$5,017.40, then divided by 365 days to compute the daily interest, and multiplied by 30 to determine the monthly interest. The process is repeated every month.

### How to monitor your savings' interest rates

Your savings' interest rates may fluctuate due to ever-shifting market conditions, which can occur in a matter of months or even days. The problem: institutions don't always inform you about rate changes. Here are a few tips on monitoring your savings interest rates so that you'll know when it's time to look for a better savings account.

Tip #1: Check your interest rate regularly
The best way to monitor your savings interest rates is to check it regularly. Visit your bank or credit union's website for updates; there may be a report in the news section, or you could just look at your savings account's product page or a separate interest rates page to see if there are any changes.