Interest in Exchange of Borrowing Your Money

• Placing money in a bank is a two-way street: As depositors we gain reward by seeing our funds grow with interest. The bank gains the opportunity to temporarily borrow our funds and lend them to someone else. In exchange, the bank grows and earns profit, charging interest on those loans made.
  
  

Calculation Method

• For the saver, the amount of interest earned is determined by the bank. The only control a saver retains is to choose which bank pays more interest than the other. Savings account interest itself compounds over time. This occurs daily, monthly and annually and pays out at regular intervals. The interest then adds to the money deposited, and that new sum grows more interest.
  
  The actual calculation is fairly straightforward: daily interest gained is equal to the amount deposited times the percentage representing a days' worth of a given interest rate. The interest rate itself depends on few other factors.
  
  

Differences from Bank to Bank

• The basis of the interest rate starts with the government. The U.S. Federal Reserve controls the prime rate, which is the interest rate that banks are allowed to charge to lend to each other and borrow from the government. The control of this rate ebbs and flows the supply of money in the economy. Banks then build their interest rates on top of this prime rate for profit from consumers. Between each other, banks are allowed to be competitive and offer lower or higher interest rates. These amounts will vary depending how much the given bank thinks it needs to pay to attract customers more than its competitors. The more competitive an institution is, the higher its interest rate offered will be.
  
  

Savings Account Interest Rates are Lower Than Other Investments

• Savings accounts generally tend to be lower in interest awarded than other investments because their deposits are still very liquid. Remember, banks reward consumers based on how long they can borrow deposited funds. Savings accounts allow depositors to withdraw fairly easily, any day desired. As a result, savings account interest will pay far less compared to a certificate of deposit, which locks deposits up for a set period. The difference can be a couple of interest rate points in variation versus a savings account.
  
  

The Type of Bank Matters

• Big corporate banks tend not to offer much in savings account interest because they derive their main business from commercial affairs. They provide savings accounts and similar products to open the door to offering other consumer products that make real profits, such as car and home loans.
  
  Small, community banks must depend on regional markets more, so they are more apt to offer higher interest rates on their savings accounts to attract consumers from big banks.
  
  Credit unions are designed around specific memberships. Employee groups are the most common (i.e. federal employees, teachers, a specific town's residents, etc.). They don't compete well with banks, but their benefit derives from offering cheaper loans to members than banks do. As a result, having a savings account is simply part of the membership requirement to join and partake in borrowing benefits.
  
  

Costs and Taxes Take a Piece

• The Internal Revenue Service considers interest gained as income earned. As a result, interest paid is reported to the IRS on a Form 1099-INT by banks. Depositors in turn are expected to include this data in tax filings.
  
  Between taxes and account fees, a saver's net gain is gross deposits plus interest gained minus account fees and taxes. The net growth mathematically is the true interest gain for the saver.