Your Bank Pays Interest: 5 Steps to Boost What You Get

Intro

Ten or twenty, same savings, from one simple rule. Same money, more interest, right from your terms page. Five steps in all, counting down to number one, the biggest.

1. Read the interest rule on your savings terms page

Number five: read the interest rule on your savings terms page. One rule pays 1% on the first thousand, and 2% above it. Another pays 2% on everything, if a thousand stays in. Say Maya keeps exactly a thousand saved.

By our count, 1% comes to ten a year, 2% to twenty. Same balance, twice the interest, just from reading one rule. That's how a savings account pays you: interest on the money you deposit, your principal. The rate tells you how much is paid in, as a share of your savings.

Savings accounts usually pay more than everyday accounts, and many are online. They often come without a debit card, so the money is harder to dip into. Next on that page, check the fees, so they don't eat up what interest adds. Savings accounts usually have no monthly fee, but withdrawals or transfers can cost one.

Some charge no transaction fees if you keep a minimum monthly balance. Most allow only a limited number of transactions. And some pay no interest for a month in which you withdraw. In some cases, an account pays interest only if at least a thousand stays in.

One guide's checklist: monthly fees, a minimum balance, a maximum balance, a linked account. Another asks what charges apply if your balance falls below the minimum. It also asks what withdrawal limits apply at the branch or the cash machine. One guide suggests checking whether the rate is fixed or variable, and whether withdrawals are restricted.

Another suggests asking your bank about any charge you don't understand. Now take a balance of 1,500. By our count, the first rule then pays twenty a year, the second thirty. A higher rate may come with less access to your money, a third guide notes.

One guide asks whether keeping money in for a minimum balance is its best use. Some banks may charge a fee to close a new account early, and even cut its interest. That guide also asks about any minimum holding period, and the penalty for closing early. To start today, open your account's terms and find the line about interest.

By our count, ten more a year adds up to fifty over five years. Subscribe, because next we cover how often interest is added, and why it matters. Every step and number in this video comes straight from official pages linked below.

2. Check how often interest is added to your balance

Number four: check how often interest is added to your balance. Each time it's added, the next interest is worked out on a larger balance. It's different from simple interest, which only applies to your starting amount. Start with a hundred at 5% a year.

After one year, it's 105. After two years, it's 110.25, not 110. By our count, that extra quarter is interest earned on interest. Over time, that can significantly increase savings, one guide notes.

Try this question from an international financial literacy survey. Someone puts a hundred in a savings account at a guaranteed 2% a year. By our count, after one year it's 102. No more deposits, no withdrawals: after five years, is it more than 110, exactly that, or less?

By our count, it's more: about 110.41, because the interest compounds. Now the frequency: one guide counts monthly as twelve times a year, and daily as 365. Its example: 10,000 at 5%, for five years. With interest added every month, it grows to 12,834.

With interest only at the end of the term, it reaches 12,500. By our count, monthly interest comes out 334 ahead. Another example: 10,000 at 3%, compounded monthly, reaches 11,616 in five years. By our count, that's 1,616 of interest, without adding anything.

Many institutions work out interest daily and pay it into the account monthly. Some accounts compound monthly, others daily, and daily may earn you more. The more often your account compounds, the more your balance grows, that guide says. Some banks apply interest to each day's closing balance.

One central bank's rule asks for savings interest to be credited every quarter or more often. Another guide's checklist asks how interest is worked out, and when it's credited. Your account agreement tells you how your interest is applied. To start, look for the words compounded and credited in that agreement.

So far: one rule doubled the interest, and monthly interest added 334. Which would you check first, number five or number four? Tell us in the comments. Next, bonus rates, and what comes after them.

3. Read the fine print of any bonus rate

Number three: read the fine print of any bonus rate. Many banks pay a bonus rate on savings if you meet certain conditions. One guide's examples: deposits of 500 a month, or a balance of at least 5,000. One checklist asks for the rate, how often it's paid, any bonus or introductory rate, and the conditions.

It also asks if you need to make regular deposits, and how much. Some banks also offer a higher rate for a short time, often to new customers. After that introductory period ends, the rate may be lower. So always check what the rate becomes after the introductory period.

An official rule's own example shows why. 7% for the first three months, then 5% for the rest of the year. On a thousand, the interest for the year works out to 56.52. That's a yearly figure of 5.65%, not seven.

By our count, the year's figure sits 1.35 points under the headline rate. The yearly figure reflects only interest, not the value of a bonus given to open the account. Let a short-term offer be one factor, not the only one, one guide says. Compare it with an account whose yearly figure is a steady 5.65.

By our count, over the year both pay about the same: fifty-six and a half on a thousand. And make sure you understand the offer's terms and conditions. And review your account when a promotional rate ends, to make sure it still fits. A fixed rate stays the same for an agreed period; a variable rate can go up or down.

To start, find the date your current rate ends, and put it in your calendar. Next, a yearly figure that helps you compare accounts.

4. Compare savings by the yearly figure

Number two: compare savings by the yearly figure, not just the advertised rate. In some places it's called the APY, in others the AER. It shows how much your savings could grow in a year, counting interest on interest. In one guide's words, it shows the interest as if it were compounded and paid out each year.

It folds the rate and how often interest is compounded into one number. And it's based on a year of 365 days. So two accounts can be compared side by side, on the same basis. One law requires banks to show it, so savers can compare accounts.

Comparing yearly figures shows which account offers the best outcome for you. Many institutions advertise an annual interest rate, so look for the yearly figure too. By our count, 5% compounded monthly gives a yearly figure of about 5.12%. Careful: one guide's similar figure also counts fees, so it's a different number.

An official rule's example: a thousand earns 61.68 in a full year. By our count, 61.68 on a thousand is 6.17%. That's the same yearly figure the rule gives. The figure assumes no deposits or withdrawals during the year.

You may earn less if your money stays in for less than a year, one guide notes. And it doesn't compare early withdrawal penalties, another adds. The higher the rate, the faster your savings grow. Compare accounts from different providers, so you find the best one for you.

Then review your account every year, and compare it with others on the market. Say Maya finds a yearly figure 1 higher. By our count, on a thousand, that's ten more a year. If you see a better rate elsewhere, ask your own bank if it can match it.

If you do switch, update any automatic payments to or from the old account. Deposit insurance may protect your savings, one guide notes. So check that a new account is covered by a deposit protection scheme where you live. To start, write down your account's yearly figure and two others.

So far: the rule, how often, the bonus terms, and the yearly figure. And now, number one.

5. Add to your savings every month

Number one: add to your savings every month, so interest works on a growing balance. Your money starts to earn interest as soon as you deposit it. One guide's example: a hundred deposited each month, at 2% a year, compounded monthly. That's about 0.167% a month: 2% divided by twelve.

Each month, the interest is worked out on a balance that includes earlier interest. In month two, it's worked out on the 200 deposited, plus the first month's interest. So each month, the interest you earn grows a little. After one year, 1,200 has gone in.

The interest comes to about 13.08, the guide's table shows. After year two: 2,400 in, and 50.64 of interest. By our count, year two alone adds 37.56, almost three times year one. The longer you keep saving, the faster your savings grow, that guide adds.

One central bank's example: 5,000 at 6%, compounded monthly, earns 308 in a year. In five years, the 5,000 grows to 6,744. The same guide lists three ways to help savings grow faster. More frequent compounding, a higher interest rate, and adding to your principal.

Those are numbers four, two and one in this video. Ideally, it's automatic: have savings moved from your paycheck or checking account, one guide suggests. If you switch banks, set up those automatic transfers again at the new one. The same guide calls it a good time to raise your savings amount.

Saving regularly and watching it build can give a real sense of financial empowerment. No matter the amount or the account, the earlier you start saving, the better. To start, pick a day just after payday for the automatic transfer. That's number one: add a little every month, so interest is worked out on a larger balance.

Information only; results vary. This is Extra Income Explained. For more to save, six sites paying within a week are on screen now.