How Often Is Interest Accrued on a Savings Account?
Original post by Francesca Lee of Demand Media
Savings accounts have features that offer investors an attractive vehicle for safe, low-risk deposits. And they come with practical incentives: They're liquid, insured and accrue interest. Products differ from bank to bank -- compounding frequency, how often they pay out, how the principal gets calculated. But they all adhere to a mandate by the Federal Deposit Insurance Corporation that determines when the accrual of interest begins and acceptable accounting standards.
Interest Adds Up
Accrued interest simply refers to how much you've earned against your account balance since your last interest payment. The calculation includes how often your savings account pays the interest rate (the rate of return, also referred to as the interest earned on the funds), the compounding frequency, and how often and how much you contribute to the account. Your accrued interest changes daily and depends on the specific terms of your account.
Daily Balance and Average Daily Balance
The Truth in Savings Act of 1991 specifies precise calculation and accounting methods banks can use to determine interest paid on the principal. The daily balance and the average daily balance (which takes your total balance and divides it by the number of days in the month to get the average amount in your account). Both methods calculate how much interest should be paid on your account at at the end of each day. You've probably seen a similar accounting practice on your credit card statement. Review your savings account statement for the method used.
The Compounding Frequency
Savings accounts that compound interest daily rank the highest, and you should seek these terms. The bank must disclose how often it compounds the rate, for example: daily, monthly, semi-annually. Look on your statement for an explanation regarding "compounding frequency." This will tell you how often the interest is compounded and will help you sort out the calculations for the accrued amount.
Annual Monthly Payments
You can have a daily compounding rate that pays outs every 30 days. Or even 90 days. These amounts are "credited" to your account and waiting in limbo for disbursement on the bank's regularly scheduled pay day. For example: You have a an interest rate that compounds daily and you receive these payments the last day of the month. Now suppose it's November 20. You have 10 more days to go, so the credited accrued amount would be for 20 days.
About the Author
Francesca Lee has more than 12 years of experience as a business writer, specializing in personal finance and education. Her articles have appeared online at Wave Newspapers, Turning Point Magazine and Facsnet. Lee studied political science at the University of California, Berkeley.
- Creatas/Creatas/Getty Images