Savings Rates Are High. Here’s How to Calculate Interest on Your Savings Accounts

Savings accounts offer a secure avenue for growing your funds, and understanding interest rates on savings accounts is crucial for optimizing returns. The interest rate, a percentage of your balance, determines how much you earn on your savings. Higher interest rates on savings accounts mean greater potential earnings. By depositing money into an interest savings account, you not only keep your funds safe but also allow them to earn interest over time. Monitoring and comparing interest rates across different savings accounts empower you to make informed financial decisions, ensuring your money works for you and maximizes its earning potential. Interest savings account rates can change from time to time but most account holders can find their current interest rate by contacting their account provider.

Savings account interest rates have been on the rise in Canada this year, with some of the best accounts offering APYs between 4% and 6%. The Bank of Canada has raised its federal interest rate several times over the past year to tamp down on surging inflation, and recently decided to hold rates steady. While this means savings account interest rates might not go any higher, they’re also not expected to drop anytime soon. If you’re not earning a competitive interest rate on your savings account, you could be leaving hundreds to thousands in interest on the table.

Here’s what you need to know about earning the best interest savings account rates.

What Exactly is Interest Rates on Savings Accounts?

A savings account is a type of deposit account that’s separate from your primary chequing account. It allows you to set aside money for different savings goals, like creating an emergency fund for unplanned expenses or growing your down payment on a future home. Many banks offer interest on their savings accounts as an incentive for you to keep your money with that bank.

Savings interest is a percentage you earn on the money you keep in a savings account. Banks compound this interest on a set schedule, so you’ll earn interest on your original balance, then you’ll earn interest on your balance plus any previous interest. Assuming the interest savings account rates are the same, you’ll earn slightly more interest at a bank that compounds daily or monthly than a bank that compounds annually.

Maximizing your interest rates on any savings account is a fundamental aspect of sound personal finance. Whether opting for a standard savings account or an interest savings account, the interest rate directly influences how much you earn. High-interest savings accounts, available through your bank or financial institution, offer an opportunity to boost earnings, especially if you maintain a healthy daily closing balance. Exploring tax-free savings accounts (TFSAs) adds another layer to your strategy, allowing your interest earned to grow without tax implications.

Ensure your savings account is backed by the Canada Deposit Insurance Corporation (CDIC) for added security. Regularly assessing interest rates on savings accounts empowers you to leverage your money effectively, aligning with your financial objectives and securing a prosperous future.While some traditional big bank savings accounts may offer less than 1% annual percentage yield (APY) on your savings, many banks in Canada have raised rates along with the central bank, with some of the most competitive accounts offering more than 6% APY on your savings.

How Do You Calculate Interest on a Savings Account?

Managing your finances wisely involves choosing the right savings account, considering factors like interest rates and how you earn interest. A regular savings account at your financial institution or local bank is a standard option, while high-interest savings accounts, like the tax-free savings account (TFSA), offer enhanced returns. Interest rates play a pivotal role, impacting how much you can earn. It's essential to understand how interest is calculated, especially in a high-interest savings account or a preferred package account.

You do not have to feel lost or in the dark about what interest rate your account is earning, You can calculate it yourself. The formula for calculating simple interest is as follows:

P x R x T = Interest Earned

P = principal, or your beginning balance

R = interest rate (annual percentage yield)

T = time period

For example, if you have $5,000 in a savings account and you earn 5% interest in a high-yield savings account all year, here’s the formula for calculating how much interest you’ll have at the end of the year:

$5,000 (principal) x 0.05 (rate) x 1 (time; one year) = $250.

You would earn $250 in that one year, assuming your savings interest rate remains the same and your bank compounds your interest annually.

With this process, you can see what high interest rate you are earning an compare it to other rates to see if you could do better with another financial institution or bank account backer.

Ensure your accounts are backed by the Canada Deposit Insurance Corporation (CDIC) for eligible deposits, providing an added layer of security for your hard-earned money. Regularly evaluating your options and staying informed about interest rates on saving accounts empowers you to make financially savvy decisions aligned with your goals.

Simple vs. Compound Interest?

If your bank compounds your interest monthly or quarterly, you’ll earn slightly more than you would if it compounded your interest annually.

For example, using the same example above, if you earn 5% on your $5,000 in savings, but the bank compounds your interest monthly, you’d earn $255.81 at the end of the year. Likewise, if your bank compounds your interest quarterly, you’d earn $254.73.

The reason you earn more with compound interest is because your bank calculates and pays out your interest more often. This increases your balance, so the next time your interest is compounded, the first round of interest will be included in the calculation.

While the difference in what you’ll earn if your bank compounds your interest monthly versus annually in this example isn’t huge — it’s just under $6 — if you have tens of thousands in a savings account, you can earn much more with a bank that compounds your interest monthly.

What Rates Are Currently Trending in Canada?

On October, 25, 2023, the Canadian central bank chose to hold rates steady, — the rate at which Canadian banks lend to one another — at 5%. The bank rate is set at 5.25% and the deposit rate is at 5%. You can also find high interest savings accounts that Canadian citizens and residents can take advantage of. While interest rates can change having a bank account with high interest savings earnings can help ensure you get the best interest rate possible.

Whenever the central bank raises rates — as it’s done several times throughout 2022 and 2023, banks typically follow suit, increasing the interest rates on consumer products like loans, credit cards, and savings accounts. That means the cost of borrowing goes up, but the amount you can earn on your savings also increases.

Right now, many Canadian banks are offering savings accounts at 4.5% or above, with some even topping 6%. It’s possible the Bank of Canada may see fit to raise rates again if inflation doesn’t continue cooling. But even if the central bank holds rates steady at its next few meetings, experts predict high savings rates will stick around through early 2024.

That makes right now a great time to earn extra interest on money in your deposit accounts. If you want to earn a competitive interest rate on your savings account, it can be helpful to look beyond some of the big banks in Canada. Bank of Montreal, for instance, is offering rates well under 2% APY for most of its savings accounts. But KOHO can offer you a high return of up to 5% APY for their high interest savings accounts.

What Interest Savings Rate Does KOHO Offer?

KOHO’s high interest savings account option has more than just a competitive interest rate — it also comes with CDIC insurance for up to $100,000, and the chance to earn 5% back on select purchases. Your interest is calculated daily and paid monthly, so you’ll also earn slightly more than other high-yield savings accounts that compound interest annually.

Whether you’re looking to earn a little extra towards your next vacation or are saving up for a big purchase, KOHO’s savings account can help put your money to work for you. You can open an account at https://www.koho.ca/save/. Get started today and see how a high interest savings account can help you maximize your high interest savings and keep more money in your bank account and in your pocket.