How to save money everyday.

How do savings accounts earn interest?

Many people know about the interest that banks charge on loans, but what about the interest that customers can earn on their savings? Learn how it all works here and how you can benefit.

5 min read

Trying to understand how interest works on savings accounts? If the answer is yes, then you’re in the right place. 

Many people have a general idea of what interest is, but they’re more familiar with the other type of interest — the one that banks charge on loans. But customers also receive interest from banks or other financial institutions on the money in their savings account. The more funds you have, the more interest you’ll earn. 

Here, we’ll dive into how interest on savings accounts works, what impacts interest rates, and how to calculate your potential interest earnings on a deposit amount. Let’s go! 

How do savings accounts earn interest?

In short, interest is the cost of a financial transaction. If you’re the borrower — for example, you take out a loan from a bank — then interest is the fee that you pay. 

However, if you’re the lender — as in, you’re putting money into a financial product like an easy-access savings account — then interest is the fee that you collect. Interest payments act as a kind of reward from the bank for holding your money with them, allowing them to loan it out and earn interest themselves. It’s calculated as a percentage of your deposit amount and is paid out monthly, quarterly, bi-yearly, or yearly. 

Another term for this is deposit interest, although it’s usually just referred to as interest.

Interest rate fluctuations 

Interest rates depend on a variety of factors, from politics to bank policies and competition in the finance sector. Percentages can fluctuate tremendously. Here’s a table of the rate changes every five years going back to 1980.

Year

Interest rate

1980

4.4%

1985

2.9%

1990

2.8%

1995

2%

2000

1.3%

2005

2%

2010

1.4%

2015

0.5%

2020

0.1%

2022

0.1%

N26 Smart—spend and save with confidence

Discover N26 Smart, our newest premium bank account
More about Smart
Smart Hero (ALL EU) Text/Media Intro.

When do interest rates rise?

In principle, you can assume that your bank's deposit interest rates will rise if general market interest rates rise, which in turn depend on the central bank’s key interest rate. However, this doesn’t always happen to the same extent — it depends on the competitive situation and the demand for loans. In times of low interest rates, savers often receive very low interest on their deposits, which can lead to reduced purchasing power.

Can you predict interest rates?

It’s nearly impossible to predict how interest rates will develop. In Europe, banks decide on their interest rate in relation to the European Central Bank’s key interest rate. In October 2023, the ECB decided against a further interest rate increase. This may mean that interest rates for banks will slow down or level off for a while.

How can I earn interest? 

Interest is money paid to you in exchange for holding your funds with a financial institution. There are a variety of account types that will pay you interest:

  • Savings accounts or passbooks 
  • Term-deposit accounts
  • Easy-access or money market savings accounts
  • Credit cards

Whether you’re planning to open a savings account for the long term, or a money market account to stay more flexible, one thing’s clear: The more money you deposit, the higher your returns will be. That’s because as soon as you begin earning interest, you’ll earn interest on the interest you’ve earned — this is known as compound interest.

Do I earn interest on my checking account? 

In rare cases, banks offer interest on checking account balances. However, even if you find an offer like this, the interest rates will likely be low in comparison to other savings products. Given this, it’s probably more worthwhile to explore other interest-bearing accounts like fixed-term deposit accounts or easy-access savings accounts. 

Interest on easy-access savings accounts

As of November 2023, banks in Germany are offering between 0.1% and 4% for easy-access deposit accounts (also called a money market account, or Tagesgeldkonto in German). This type of account has two major advantages: you’ll earn a competitive interest rate, and you can access your funds whenever you need them. 

N26 Instant Savings

Earn up to 2.6% interest p.a. with no extra fees, no deposit limits and full flexibility.
Open a savings account
Savings Account.

Which banks offer interest on deposits?

Many financial institutions have products that pay interest on customer deposits, so it’s important to do your research to get the best rates. Here are some kinds of financial institutions that offer interest-bearing accounts:

  • Traditional banks
  • Online banks 
  • Credit card companies 
  • Building and housing collectives (Bausparverträge in German)

Which banks pay the most interest? 

The interest rate you earn on your deposit can vary quite a bit between banks. As a general rule, traditional banks offer lower interest rates. Online banks can sometimes offer higher interest rates because their business model allows them to save money on other costs — and pass the savings onto their customers by way of interest.

Calculating interest

How much interest you’ll earn on your money in real terms depends on a variety of factors, from your deposit amount to the amount of time the money is invested. The good news? It’s not as complex as you might think. 

How can I calculate the interest on my savings?

You can use a tool like our interest calculator to figure out your future interest earnings in minutes. Simply enter your deposit amount, interest rate, and investment timeframe and that’s it — you’re all set to start earning. 

This is the most basic type of calculation, and it doesn’t factor in the additional interest earned on capital gains. Here’s the formula:

I = D×r×t

Here’s a breakdown of what this means:

  • I = the total interest amount
  • D = your deposit amount
  • r = interest rate per period (in decimal form — for example, 5% is represented as 0.05) 
  • t = time period

So, the interest you’ll earn is your deposit amount multiplied by the interest rate, then further multiplied by the time period that you leave your money in the account.

One more thing to note: There’s a difference between nominal interest and effective yearly interest, which also takes into account fees and capital gains taxes.

Budgeting made easy

Visualize your daily expenses and savings to help you make the most out of your money.
Try the budgeting calculator
Spaces tile in N26 App.

Make your money work for you with N26

Want to earn even more interest on your money? The faster you save, the more wealth you can build. That’s where N26 comes in. Keep your finances in check with our clever Insights feature, and check out Monthly Wrap-Up to learn where your money is going each month and spot opportunities to save even more. Speaking of savings, try out Spaces sub-accounts, included in every premium account. These virtual piggy banks allow you to save for up to 10 goals that matter to you. Round up each purchase to the nearest euro to save a little every time you spend, or stash away a portion of each paycheck with Income Sorter. Start saving the smart way. Open an N26 account today. 

By N26

Love your bank

Related posts

These might also interest you
emergency fund and rainy day fund image with cloud with euro rain drops.

What is an emergency and rainy day fund? Here’s how to set one up

Give yourself some peace of mind by saving for life’s unexpected surprises.

man in white crew neck t-shirt sitting on car seat with 3 other friends.

How much does a car cost? A guide to the average cost of owning a car

If you're wondering how much cars actually cost to run and maintain, take a look at our financial guide to the average cost of owning a car.

set of different travel related objects.

How to save money for a trip in 10 simple steps

Are you ready for a break? Here’s how to save up for the trip of a lifetime.