You trust your bank to keep your money secure, but you might feel even more comfortable with your finances by understanding the specifics of your account. Your savings account and its interest give you the financial cushion to feel confident about your future. So, below is everything to know about interest and how it affects your savings account.

What Is Interest?

Interest is an amount of money paid to someone in exchange for borrowing their money. If you borrow money from an entity, such as a loan from a bank, then they’ll ask you to pay interest on top of the original loan since you’re temporarily using their funds. Interest is calculated in percentages. 

How Does Interest Work for a Savings Account?

When you open a savings account and deposit money into it, the bank will pay you interest on that amount because they borrow that money from you. While they won’t actively take the money from you, they reward you with interest since you’re contributing to their overall financial strength. As a result, the higher the interest rate, the more you’ll benefit. If your interest rate is 1%, then you’ll receive 1% of your savings account from the bank at certain time intervals, such as quarterly or annually. 

What Determines the Interest Rate?

The bank ultimately sets the interest rate. Economic conditions and the popularity of the bank are two main factors that influence interest rates. For example, if a bank wants to bring in new business, then it’ll likely increase the interest rates to make opening an account more enticing. You should use the annual percentage yield, or APY, to make interest rate comparisons between banks. The APY considers both the interest rate and whether the interest compounds. If the interest compounds, it means the interest rate is applied to the entire amount in the savings account, including what you’ve earned from the interest, instead of only the funds you’ve deposited yourself.

Are you looking for a friendly and reliable bank to keep your money safe? The professionals at First State Bank in Russellville, AR, will work closely with you to manage your finances. They have provided the top banking services to those in the River Valley since 1934. Whether you’re looking to secure a loan to purchase your first home or want to set up a savings account, they’ll always make the process easy. For more information about their savings accounts, call (479) 498-2400, or visit their website to learn more about how they can make you feel more comfortable with your finances.