Definition of Interest on Savings

When you deposit money in some form of savings account with a bank or other financial institution, you get paid for their use of that money. The payment is interest on savings and is based on an annual percentage of the balance in your account, called the interest rate. Except for some money market accounts, savings accounts with banks and credit unions are insured by the federal government. Interest-bearing accounts with other financial institutions are usually not insured, although they may still be very safe.

Simple interest is a flat annual rate. Compound interest occurs when interest is calculated monthly, weekly or daily and added to your balance. It then starts earning more interest.

Common types of accounts that pay interest are regular savings and certificates of deposit (CDs) from banks and credit unions, and money market accounts from these and other financial institutions.

Regular savings accounts pay lower interest on savings than other types of savings accounts, but have low minimums, and you have quick access to your money.

When you purchase a CD, you get higher interest on savings in exchange for agreeing to leave the money on deposit until a specified date, called the maturity date.

Money market funds use your savings to buy interest-bearing government and corporate bonds. You are paid part of the interest these bonds earn.