Interest-bearing accounts are an excellent option to grow your money over time. Depending on the type of account you choose, your money will earn varying amounts of interest.
Like many other accounts, keep in mind that you will have to meet some additional requirements. Continue reading for everything you need to know about interest-bearing bank accounts, including all the pros and cons you should consider.
What Is An Interest-Bearing Account?
An interest bearing account is a type of bank account that allows you to earn interest on the balance in your account. You act as a lender, allowing the bank to keep your money for a while. In return, you get some interest back for “lending” the money to the bank.
There are several types of interest-bearing accounts available today, including:
- Interest-Bearing Savings Accounts
- Interest-Bearing Checking Accounts
- High-Yield Online Savings Accounts
- High-Yield Checking Accounts
- Money Market Accounts
- Certificates of Deposit
Interest-Bearing Savings Accounts
Savings accounts are the most basic form of interest-bearing accounts. You can open them in a few steps at any financial institution like banks and credit unions.
They are usually the accounts you use for the money you intend to save rather than spend. Savings accounts can be a convenient place to stash your emergency fund or IRA.
Some banks let you transfer money back and forth between your savings and checking account. However, be careful because this may come at a price, especially if you’re making the transfer to avoid steep overdraft fees.
Interest-Bearing Checking Accounts
Regular checking accounts don’t usually earn any interest on the money deposited into the account, however, some banks offer interest-bearing checking account options. These accounts give you all of the perks of a checking account, and at the same time, let you earn some returns.
However, they also often need you to meet additional requirements because they offer interest – like high opening deposits and potentially paying monthly maintenance fees. Make sure you meet all of these requirements – and think whether the returns you get are worth the monthly fee you’ll have to pay.
High-Yield Online Savings Accounts
Typically, online banks can give you higher interest rates because they don’t have to pay to maintain a brick-and-mortar office. Online-only banks let you transfer funds between your savings and checking accounts, just like traditional banks. Opening an online account is usually highly convenient. It comes with online banking, wire transfers, direct deposit, bill pay, mobile apps, and so on.
However, keep in mind that if you need extra help, you won’t be able to talk to a bank teller in person. If that’s a dealbreaker for you, then you are better off with a traditional bank. If you’d be happy to give that up and don’t mind accessing 24/7 customer service online, then an online bank is an option worth considering.
High-Yield Checking Accounts
Like with savings accounts, some high-yield checking accounts earn a higher APY than others. These accounts are usually best for short-term savings goals because they let you grow your funds relatively quickly.
However, they typically have variable interest rates, meaning you might not always earn the high APY initially.
Money Market Accounts (MMAs)
Money market accounts are an excellent option if you’re happy for the initial deposit to be a substantial sum of money (think $5,000 or more). Financial institutions usually ask you for a larger initial deposit to open a money market account – in return for higher interest than you’d get with a simple savings account.
You could say that MMAs are a mix of savings accounts and checking accounts. They give you most of the perks a checking account would offer, like a linked debit card, cashier’s checks, and limited monthly ATM withdrawals.
In addition to these perks, your savings grow at the same time. Money market accounts have higher interest rates than regular savings accounts, but keep in mind that you’ll have to maintain a minimum balance in the account. You won’t have much flexibility.
If you want to access your money easily or don’t have a large sum of money saved yet, explore other interest-bearing account options instead.
Certificates of Deposit (CDs)
Certificates of deposit accounts (CDs) are a type of savings account suitable for long-term savings plans. Certificates of deposit earn a fixed interest rate, so no disappointments. However, you can’t withdraw your money until it has matured – or you may need to pay some penalties.
You can decide for how long you’d like to leave your money in the account. Typically terms go from 1 to 5 years. The longer the money takes to mature, the higher the total interest rate you earn will be. That’s what makes CDs an excellent interest-bearing account for long-term savings.
If you want a quicker return on your money, or think you’ll need to withdraw your funds soon, then it’s probably best to opt for a different type of account. Also, minimum deposits required to open a CD vary from $200 to as much as $10,000. It will depend on the type of CD and the financial institution’s policies.
Pros & Cons of Interest-Bearing Accounts
Interest-bearing accounts offer many benefits, and while they are a great way to grow your savings, there are some potential disadvantages to keep in mind.
- Interest: the most obvious benefit of interest-bearing accounts is that your money will grow. When you deposit money in an interest-bearing account, the bank wants you to leave it in there for as long as possible. They reward you for doing so with a high APY. Why? Because while they have your money, they will use it for their operations, like lending it to other clients and making a profit on that. It’s a win-win situation since the bank can have more funds, and you get rewarded!
- No temptation: most of these accounts will make you pay a fee if you want to withdraw your money from the account before the time. This way, you’ll be encouraged to keep your money in the account, eliminating the temptation and making it somewhat easier to reach your saving goals.
- Many options: there’s plenty of choices when it comes to interest-bearing accounts. There are checking accounts and savings accounts. Some are better for long-term savings and others for short-term savings, compounding interest daily and some monthly. There is an interest-bearing account for everyone!
- FDIC insured: depositors should always ensure that their bank is a member FDIC (Federal Deposit Insurance Corporation). If the deposit is FDIC insured, you can rest assured that your money is protected, even if the bank or credit union you’re with fails.
- Maintenance fees: some financial institutions will charge you a monthly maintenance or service fee to keep your account open. It’s better to make sure you’re fully aware of all fees the bank may charge you beforehand to avoid unpleasant surprises. Many online-only banks will waive the fees, but it’s always best not to take anything for granted. Ask a bank representative or customer service if you are in doubt.
- Minimum balance requirements: most APY-earning accounts will ask you to deposit a certain amount in your new account and keep a certain amount of money in there every month. Some banks will charge you a penalty for each statement cycle or close your account if you don’t meet the minimums. Others might only stop offering the APY you were expecting. It’s essential to make sure you’re clear on what these minimums are and know you can meet them before opening an account.
- ATM fees: interest-bearing accounts are typically for savings rather than spending money on day-to-day operations. As such, the ones that give you the option of having a debit card and ATM use will limit withdrawals. If you exceed the limit, you’ll have to pay the price in fees or penalties.
- Lack of liquidity: most interest-bearing accounts reward you for leaving the money in the account for a longer time. With some of them, it will be impossible to withdraw your funds early. That means you usually won’t have easy access to your money (without impacting the price).
Frequently Asked Questions
What is the best interest-bearing account?
The answer to this question highly depends on what your financial needs and expectations are. If you want your money to grow quickly, don’t mind a higher minimum opening deposit, and paying some fees, then a high-yield account might be for you.
If you want an account for a long-term savings plan and don’t need quick access to your money, opening a CD account may be a good option for more money growth in the long run.
The simplest account would be a regular savings account. However, if you need financial services typically offered with a checking account, choose an interest-bearing checking account or a money market account (MMA).
An MMA is a savings account with some added benefits such as a debit card or credit card and check-writing.
As you can see, it all depends on your goals, and there isn’t a single best interest-bearing account.
How much interest will I get on $1000 a year in a savings account?
It depends on which type of savings account you have and on how much APY it earns. For example, if you put $1000 in a savings account that earns a low 0.01% annual percentage yield, you’ll end up with only $1000.10 after a year.
Instead, you could have earned $5 in a year if you opened a high-interest savings account. CDs and money market accounts might have even higher returns if you leave the money in the account long-term.
How do you calculate interest-bearing deposits?
Interest earnings can be calculated in different ways. Depending on your account and the financial institution you have opened it with, you’ll earn a different interest rate.
The interest rate you’ll earn for savings accounts is based on compound interest, i.e., both the initial deposit and all the accumulated interest will be considered.
The interest is usually calculated using the APY (annual percentage yield), which is how much your account earns in one year, including compound interest.
If you have a fixed interest rate, multiply the account balance by the interest rate for the selected period of time you were planning on leaving the money in the account without withdrawals. You’ll quickly find out how much interest the account should earn during that time.
On the other hand, if your account earns a variable interest rate, it will be trickier to calculate since the interest can change from time to time. A lot will depend on your principal, the original sum you put in the account, how much time you want to let the funds in the account grow, and the APY your bank offers.
Also, keep in mind that some financial institutions compound interest monthly. In contrast, others do it daily, and so on, and this can also change how quickly your savings will grow.