How Does An Interest Bearing Account Work?

How does an interest bearing account work

If you’re trying to get your finances in order, one of the first things you will need to do is set up a savings account. There are numerous benefits to having a savings account, from making sure you have an emergency fund for unexpected expenses, to saving up for a down payment on a house.

Regardless of your reasons for saving, one of the best ways to save is with an interest-bearing account. Instead of leaving large amounts of money in non-interest bearing accounts or stuffing it under your mattress, let your cash multiply by putting it into an account that pays you interest!

What is an interest-bearing account?

An interest-bearing account is a bank account that gives you interest for the money you have deposited. You basically get paid to keep your money in one place.

Why you might ask? That’s because when you deposit money into a savings account, the bank uses that money to either make investments or offer loans to other clients.

Then, they pay you interest from their earnings. This is true whether you open a regular savings account or a high-yield account.

Different types of interest-bearing accounts

Even though most savings accounts pay interest, they're not all the same. For instance, a high-yield savings account typically offers a much higher interest rate than traditional savings accounts.

Below are the most popular accounts where you can earn interest. They include savings accounts, high-yield online savings accounts, money market accounts, and Certificates of Deposit.

The best type of savings account for you depends on your timeframe, goals, and administrative needs.

Also, keep in mind that the Federal Reserve determines the current national interest rates. Officially called, the Federal Open Market Committee (FOMC), it consists of members of the Federal Reserve Board and Federal Reserve Bank.

1. Interest-bearing checking accounts

Typically, checking accounts are non-interest-bearing accounts, but now some pay interest on your balance. Banks started offering interest-bearing checking accounts to convince customers to leave their money with them instead of putting it in other savings accounts.

The interest rates that come with these accounts are fairly low, but they might be close to or almost the same as what some savings accounts pay. This gives customers the best of both worlds of having access to a debit card, unlimited transactions, and interest payments in one account.

Some interest-bearing checking accounts pay a flat interest rate every month regardless of your balance. And some accounts pay higher rates once you reach a certain balance amount.

But as always, know the fees associated with the interest-bearing checking account. Because if the fees are too high, you may be paying more to earn a small amount of interest.

You may be better off with a free non-interest bearing account for your everyday expenses and deposit your extra cash in any of the other accounts we'll discuss below.

2. Regular savings account

A regular savings account is the most common form of deposit account that earns interest. It's an account where you store money you don't need for monthly expenses and everyday transactions like your emergency fund.

You can easily open a new account with traditional banks, online banks, and credit unions. They're convenient because it's easy to transfer money in and out. You can connect it to your checking account's ATM card for easy balance transfers or direct deposits.

The U.S. government also limits withdrawals from a savings account to only six per month. So, take note of your bank's rules in this matter when you're looking at savings account options.

Most banks usually charge a penalty fee. But if you keep making more than six withdrawals a month, your bank could close your account or turn it into a checking account.

3. High yield savings account

High-yield savings accounts have become popular in recent years because of the higher interest rates they offer compared to regular savings accounts.

However, despite the name, "high yield", interest rates in recent times are not that high. Keep in mind that these rates go up or down based on the economy and the individual banks.

You can open high yield accounts from traditional banks, credit unions, and online banks. But online banks may offer higher interest rates and charge fewer fees than their brick and mortar counterparts.

They can do this because they have lower operating costs compared to brick-and-mortar banks. So, you may find that most online banks don't charge monthly maintenance fees or minimum balance fees. Some don’t have a minimum balance or initial deposit requirements either.

So, take note of these features when you're looking for a high-yield savings account. Because who doesn't want to get a higher rate and also save money on fees, right?

4. Money market account (MMA)

If you want to deposit a large amount of cash and won’t need access to your savings for a while, then a money market deposit account might be a good choice. They come with the perks of a checking account like check-writing ability and debit card usage.

But you will normally have to deposit a significant amount of money to open a money market account. This is how you can avail of the higher interest rates.

So this option is best if you already have a bit of money saved up. Just note that some banks may charge a fee if you go below the required minimum deposit.

5. Certificate of deposit (CD)

Also known as a CD, a certificate of deposit generally has the highest interest rate. However, you generally have to keep your money in your account for a much longer period of time to get a higher interest rate. And during this time you won’t be able to take out the funds.

Just like with a money market account, you will have to deposit a certain amount into the CD. The initial deposit can vary, from $200 to as much as $10,000. You can have a CD for as short as a few months, to a few years. This is a good option for longer-term planning.

What fees to expect with interest-bearing accounts?

Expect some fees when you open up an interest-bearing account. Make sure you look these up ahead of time so you don’t get any unpleasant surprises when you check your monthly balance or try to withdraw funds.

Maintenance fees

Some accounts will charge a monthly or yearly fee to maintain the account and keep it open.

Account minimum fees

You could be charged if you don't maintain the minimum balance requirements.

Withdrawal fees

If you try to withdraw the funds, you could be charged a certain amount or receive penalties, depending on the account.

Are interest-bearing accounts FDIC insured?

The answer depends on how much money you have on the account and whether the bank you opened an account with is a member of the FDIC. So, before opening an account at any bank, you should check if they're a member of the FDIC.

The Federal Deposit Insurance Corporation provides federal insurance in case of bank failures. The standard insurance amount is $250,000 per depositor, per insured bank, for each account category.

You don’t have to purchase deposit insurance. You are automatically covered as long as you open a deposit account in an FDIC-insured bank. (Bank websites will usually state "Member FDIC").

On the other hand, if you're opening an account with a credit union, make sure they're a member of the NCUA. The National Credit Union Association covers the safety and soundness of the credit union system.

What are the benefits of interest-bearing accounts?

There are a number of reasons you should open an interest-bearing account. Not only will you earn money from your savings, but you can keep it in a place where you won’t be tempted to spend it.

It’s always a good idea to save money and keeping one or even several accounts that earn you interest is an even better idea.

Just getting started with your finances and want to save some cash with an online bank? Have longer-term goals in mind and want to open a CD? Interest-bearing accounts can be the secret to making your money grow!

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

Interest rates vary depending on the account where you put your money. With a savings account, it is based on compound interest, where the principal and all accumulated interest are taken into account.

This interest is usually calculated using the annual percentage yield (APY). This is how much money your account earns in one year, including compound interest.

How much you earn depends on what type of account you have. You will earn different rates if the account is compounded. Compounding means the interest on your initial deposit, plus any interest you’ve already earned. Interests are either compounded daily, monthly, quarterly, or even annually.

If your account just offers simple interest, then you will just earn a set percentage of money invested in the account each year.

Similarly, your account will get a different return if you have a fixed or variable rate. And of course, your total return will vary by how much you have in your account, to begin with.

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

If you want to put your money into an interest-bearing account, there are a number of things to consider. Do you want to deposit a lump sum or contribute to the account every month? How often do you want to withdraw funds?

To check how much your money can earn in a year in a high-yield savings account, you can use an interest-bearing account calculator.

How to use the interest-bearing account calculator

The savings calculator will help you understand how much your money can grow over time. Here's what you'll need to input:

Starting balance

This is the amount you plan to deposit in the account when you open it.

Monthly contributions

This is optional, but it refers to the amount you plan to deposit monthly.

Time to grow

This refers to the period of time you plan to leave the money in your savings without a withdrawal. You have the option of putting in a number of years or months.

Annual interest rate

Enter the interest rate being offered by the bank or the interest rate you expect to earn. You can put zero as well if you're saving in a non-interest bearing account.

The best Interest-bearing account calculators to use

One way to see how even small amounts saved each month can grow is to use the calculator with a monthly deposit. And then, try again with a $25 or $50 deposit per month for comparison.


You can use the Savings Goal Calculator provided by to estimate how much money you need to save each month to reach your savings goal.

2. Bankrate

Use Bankrate's Simple Savings Calculator to compute how much interest you'll earn on your investments such as your IRA and savings accounts.

If you're saving for something like a wedding or a down payment for a house, you can also use the calculator to work out how much you need to deposit each month to reach your goal.

3. Marcus by Goldman Sachs

Use this Savings Account Calculator from Marcus to see how much interest you could be earning with a high-yield savings account.


Try this interest-bearing account calculator from to compute how much money you'll have when you decide to withdraw your savings.

It is more complex as it considers additional factors like tax and inflation. And you can even increase your monthly deposits or calculate zero interest rate if you're putting money in a non-interest bearing account.

Grow your money faster with interest-bearing accounts

Whether it's $5 or $500, every dollar counts when you're trying to save. Take advantage of interest-bearing accounts, don't leave money on the table. It might not seem like a lot but don't dismiss earning even small amounts of interest.

Over time and with the power of compounding the interest can help your money grow into a big deal! Plus you'll achieve your savings goals sooner!

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