is a smart way to prepare for financial emergencies and save for the future. Even better, savings accounts pay interest on your balance, helping your money to grow faster.
If you’ve saved up $10,000, congratulations: That’s an impressive sum. The next step is that pays a competitive interest rate so you can reach your goals sooner. Here’s a look at how much $10,000 in a savings account could potentially earn over one year based on the type of account and interest rate you select.
How savings account interest rates work
When you deposit money in a savings account, the bank uses those funds to provide loans and make investments, which generate revenue. Banks pay interest on customers’ savings to encourage them to deposit more money.
The interest rate on your savings account is the base rate. Meanwhile, the (APY) factors in the rate at which to give you a more accurate picture of how much you’ll earn.
The difference between simple and compound interest can be quite powerful:
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Simple interest: Calculated on the original (principal) amount you deposit.
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Compound interest: Calculated on the original amount and any interest already earned. Interest can compound daily, monthly, quarterly, or yearly.
How much you can earn with $10,000 in a savings account
To give an example of how compound interest can impact your savings, suppose you have $10,000 in a high-yield savings account earning 4%. At the end of one year, this account would earn $400 with simple interest. But if the interest compounds monthly, it would earn $407.42 after one year. If interest compounds daily, your earnings would be $408.08.
That might not seem like a big difference, but compound interest has a snowball effect that grows with time. Say you decide to contribute an additional $100 per month to that same account and continue saving for five years. Then, you’d have a total of $18,839.86 in savings — including $2,839.86 in interest on top of the $16,000 in total contributions.
There can be big differences in interest rates depending on the type of savings account you choose. Some of the most common types of accounts include:
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: These accounts are typically available from larger or brick-and-mortar banks. Interest rates on these accounts are usually very low.
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: Common among (and, increasingly, online divisions of traditional banks), these accounts offer much higher interest rates.
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: These accounts are like a cross between checking and savings accounts, offering some features of both. For instance, they might include a debit card and let you write checks. However, you may be required to maintain a high minimum balance to earn the highest advertised rate and avoid fees.
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: CDs pay a higher yield in exchange for leaving your money in the account for a set period, known as the term. CD terms can range from a few months to several years; if you pull out your money before the CD matures, you’ll incur an . So, it’s important to weigh potential earnings against loss of liquidity.
The interest rates on these accounts can vary significantly. The following table shows how much you could earn by placing $10,000 in an account based on typical interest rates today.
How to choose a savings account that helps your money grow
There are many factors to consider when choosing a savings account. Of course, APY is a big one. The higher the APY, the faster your money will grow.
However, there are some other important factors to consider, which can also impact your potential earnings:
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Fees: Some accounts have monthly maintenance fees or charge you for . It’s best to seek out savings accounts that charge few or no fees.
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Minimum balance requirements: Some accounts have minimum balance requirements. If your account falls below the minimum, you may not earn the highest APY or have to pay a monthly maintenance fee. Look for accounts with no minimum balance requirements.
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Federal insurance: The bank you choose should be insured by the (FDIC) in case the bank fails. FDIC insurance covers $250,000 per depositor, per institution, per ownership category. The (NCUA) protects deposits at credit unions.
Don’t automatically settle for your main bank when choosing a savings account. While this can be convenient, it may not lead to the best results in terms of APY, fees, minimum balance requirements, etc. Consider shopping around and using .