How does interest work in a savings account?

Interest in a savings account functions as a way for banks to compensate account holders for the money they deposit and allow the bank to use. It is calculated as a percentage of the balance held in the account. This percentage, known as the interest rate, represents the return earned after a certain period. The more money that is in the account and the higher the interest rate, the more interest can accrue over time.

Understanding this concept is crucial for consumers as it highlights the benefit of saving money. By simply maintaining a balance in a savings account, individuals can generate additional income through interest, thereby growing their savings over time. This encourages saving, as funds in a savings account are not only safe but also earn a return.