Why Do Banks Give You Interest on a Savings Account?

Money Monday: Why Do Banks Give You Interest on a Savings Account?

Welcome to Money Monday! This is a place and a time where we try to introduce ways to earn money through smart financial choices. Last Monday Monday we talked about credit card rewards cash. This week we’re going to look at interest. Specifically the interest that you can get from a savings account at the bank.

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Why do banks give you interest on a savings account? We’re glad they do, but why would the bank basically give you free money in exchange for keeping your money in their institution? It all comes down to how a savings account works.

Why Does a Savings Account Earn Interest?

It's important to keep track of extra funds that you earn from your savings accountThe assumption by a bank when you open a savings account is that you are not going to use that money very often, and that it won’t have the same traffic as a normal checking account. Indeed, when you open a savings account, there may be rules in place about how often and how much you can withdraw from the account per month.

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This is because the banks use the money in savings accounts to lend to other customers for things like car loans, and they need a fair amount of money available to be able to lend it out. When the bank lends out money, the folks getting the loan end up paying interest on it. The bank makes money, and it then pays interest on the savings account so that people invest in savings accounts. The bank needs to have access to those funds when it wants to offer loans.

What Determines Interest on Savings Accounts?

If you have extra funds in your budget, but you don’t want to completely lose access to them in a CD or the stock market, then a savings account is a good way to make a little interest in a very safe way. Different banks will offer different interest numbers depending on the national interest rate and also how much they want people to open savings accounts. When opening an account, it is smart to check out the interest options at different banks, and also make sure you understand the rules and limits about withdrawing money from the account.

We hope this helped you understand savings accounts a little better. Happy Monday Monday!