How bank accounts grow your money

A bank account grows your money through interest—a percentage of your balance that the bank pays you regularly, usually monthly or daily. The bank lends out the money you deposit, charges borrowers a higher rate, and shares part of that difference with you. The amount you earn depends on three things: how much you have in the account, how long it stays there, and the interest rate the bank offers.

Not all accounts pay interest. A basic checking account typically pays nothing or nearly nothing. Savings accounts, money market accounts, and certificates of deposit (CDs) all pay interest, but at different rates and with different rules about when you can withdraw your money. The higher the rate, the more you earn—but often the more restrictions come with it.

Key Takeaways

  • Savings accounts pay interest on your balance but let you withdraw money whenever you need it, though some banks limit how often.
  • Money market accounts pay higher interest than savings accounts but usually require a larger minimum balance and limit your monthly withdrawals.
  • Certificates of deposit (CDs) pay the highest interest rates but lock your money away for a set period—three months to five years—and charge a penalty if you withdraw early.
  • Interest rates vary widely between banks, so comparing rates before opening an account can mean hundreds of dollars in difference over a year.
  • High-yield savings accounts at online banks currently pay significantly more than traditional bank savings accounts, though rates change as the Federal Reserve adjusts its benchmark rate.

Savings accounts: interest with access to your money

A savings account is the simplest way to earn interest. You deposit money, the bank pays you interest on whatever balance sits in the account, and you can withdraw it whenever you want. Most banks pay interest monthly, meaning they add the earned amount to your account on the same day each month.

The tradeoff is that savings account interest rates are low—often less than 0.01% at large traditional banks. That means on a $10,000 balance, you might earn $1 per year. Online banks and credit unions typically offer higher rates, sometimes 4% to 5% annually, which would earn you $400 to $500 on that same $10,000 in a year.

Some banks limit how many times per month you can withdraw from a savings account without a fee, though this rule is less common now than it was before 2020. Check the account terms before opening one if frequent withdrawals matter to you.

Money market accounts: higher rates with strings attached

A money market account is a hybrid between a savings account and a checking account. It pays interest like a savings account—usually higher interest than a regular savings account—but it also comes with a debit card and checks, so you can access your money more like a checking account would.

The catch is that money market accounts typically require a higher minimum balance to open and to earn the advertised interest rate. Some banks require $2,500 or $10,000 minimum; others have no minimum. If your balance drops below the minimum, the interest rate drops sharply or disappears entirely. Money market accounts also limit the number of withdrawals or transfers you can make per month—usually six—before fees kick in.

Money market accounts make sense if you have a larger amount of money sitting aside that you might need to access occasionally, but not frequently. The higher interest rate compensates for the larger balance requirement.

Certificates of deposit: the highest rates for locked-away money

A certificate of deposit (CD) is an agreement: you give the bank a sum of money for a fixed period—three months, six months, one year, three years, or five years—and the bank pays you a set interest rate for that entire period. CDs pay the highest interest rates of any standard bank account because the bank knows exactly how long it has your money.

The tradeoff is that your money is locked. If you withdraw before the term ends, you pay an early withdrawal penalty, which is typically a certain number of months' worth of interest. A one-year CD with a three-month penalty means if you withdraw after six months, you lose three months of the interest you would have earned. The penalty amount varies by bank and by CD term.

CDs are useful if you know you will not need the money for a specific period and want to may provide a rate that will not change. Interest rates fluctuate constantly, so locking in a rate today protects you if rates drop—but it also means you miss out if rates rise.

How interest rates are set and why they change

Banks set their own interest rates, but they follow the federal funds rate—a benchmark rate set by the Federal Reserve that influences how much banks charge each other to borrow overnight. When the Federal Reserve raises its rate, banks typically raise the interest they pay on savings accounts and CDs. When it lowers the rate, banks lower what they pay you.

This means the interest rate you see advertised today may not be the rate you earn next year. Savings accounts and money market accounts have variable rates that can change at any time. CDs lock in a fixed rate for the entire term, so you know exactly what you will earn.

Banks also compete for deposits. Online banks, which have lower overhead costs than brick-and-mortar branches, often pay higher rates to attract customers. A savings account at an online bank might pay 4.5% while the same account at a large traditional bank pays 0.01%. Over time, this difference compounds significantly.

Comparing accounts: what to look for

When deciding which account to use, compare the interest rate first—but also check the minimum balance requirement, any monthly fees, and withdrawal limits. A high interest rate means nothing if you have to maintain a $25,000 minimum balance you do not have, or if monthly fees eat into your earnings.

For savings accounts and money market accounts, look at whether the rate is may provide or promotional. Some banks offer a high rate for the first few months to attract new customers, then drop it sharply. Read the fine print to see when the rate changes.

For CDs, compare the rate, the term length, and the early withdrawal penalty. A CD with a higher rate but a steep penalty might not be worth it if you think you might need the money. Some banks offer "no-penalty CDs" that let you withdraw early without a penalty, though the interest rate is lower to compensate.

The math: how much you actually earn

Interest compounds, meaning you earn interest on your interest. If you deposit $5,000 in a savings account paying 4% annually and leave it untouched for one year, you earn $200. If you leave it for a second year, you earn $200 on the original $5,000 plus about $8 on the $200 you earned the first year—a total of $208 that year. Over decades, this compounds into significant growth, but over months or a year or two, the difference is modest.

The real difference comes from comparing account types and banks. A $10,000 balance in a traditional bank savings account paying 0.01% earns $1 per year. The same $10,000 in a high-yield savings account paying 4.5% earns $450 per year. Over five years, that is a difference of $2,245 in total earnings on the same initial deposit.

Frequently Asked Questions

Can I lose money in a savings account or CD?

No. Your principal—the money you deposit—is protected by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per account type per bank. You cannot lose your deposit. You can only earn less interest than you expected if rates drop, or earn nothing if you keep money in a non-interest-bearing account.

What happens to my CD when the term ends?

When a CD matures, the bank pays you the principal plus all the interest you earned. You then have a grace period—usually seven to ten days—to decide what to do next. You can withdraw the money, open a new CD at the current rate, or move it to a savings account. If you do nothing, many banks automatically renew the CD at the current rate for the same term.

Is a high-yield savings account the same as a money market account?

No. A high-yield savings account is a savings account that pays a higher interest rate, usually at an online bank. A money market account is a different product that includes check-writing and debit card access, requires a higher minimum balance, and limits withdrawals. Both pay interest, but they work differently.

Should I put all my money in a CD to earn the most interest?

Not necessarily. CDs lock your money away, so if you need cash for an emergency, you pay a penalty. A better strategy is to keep three to six months of expenses in a high-yield savings account for emergencies, then put additional money you will not need for a specific period into a CD. This balances earning potential with access.

Do I pay taxes on the interest I earn?

Yes. Interest earned in any account is taxable income. The bank will send you a 1099-INT form at the end of the year if you earned $10 or more in interest, and you report that amount on your tax return. This is one reason why very low interest rates on traditional savings accounts barely matter—the tax on the earnings is minimal.