TLDR
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An interest rate is the percentage of your deposit balance that a bank will pay to hold your money in an account with them.
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Most personal savings accounts offer simple interest (linear growth), while many investment accounts offer compound interest (exponential growth).
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Most savings accounts calculate your earned interest daily but pay it to your account monthly.
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A high interest savings account (HISA) allows you to earn higher interest on every dollar than traditional savings accounts.
Whether you’re saving for a small goal, a rainy day or a big-ticket item, you’ve probably heard about the importance of a savings account. It’s a safe place you can tuck away money, keeping it ‘out of sight’ of the daily transactions that take place in your chequing account.
When you’re choosing to stash away your hard-earned funds in a savings account, it’s natural to have questions about how the account works—and whether it’ll help you grow your savings instead of just hold it. It’s common to wonder:
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How much interest will I earn on my savings?
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How is that interest calculated?
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What is an interest rate on a savings account, anyway?
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Is my money truly safe in a savings account?
We’re diving into your top questions about savings accounts interest, so you can feel confident saving your money—and growing it to meet your financial goals.
From interest rates to payment frequency, let’s explore some common questions about how interest works.
What is an interest rate on a savings account?
An interest rate on a savings account is the percentage of your principal (deposit) balance that a financial institution will pay you when you choose to hold your money with them.
Why do they do this? Well, with so many options out there, banks offer competitive interest rates to incentivize you to choose and stick with them. When you deposit money into a savings account, it increases the bank’s assets—giving them more leeway to make loans or invest. In return, they pay you interest!
How is interest calculated on a savings account?
Let’s define a few key variables that will help us explain how interest is calculated on a savings account.
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Principal is the money you deposit into the account, excluding any interest earned.
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Rate refers tothe annual interest rate offered in the account.
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Time refers to how long the money has been in the account.
Personal savings accounts typically use a simple interest formula to calculate interest. (This is different from certain investment products, which use a compound interest formula to calculate interest.) In short, the simple interest formula is:
Interest = Principal * Rate * Time
You can adapt this formula to fit different savings account scenarios. For example, many banks calculate interest daily and pay it to your savings account monthly.
Let’s see what this will look like if you deposit $5,000 (and nothing more for a full year), and we assume an interest rate of 0.750% that remains the same for the entire year. This is just for learning purposes—interest rates are always subject to change.
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Principal: $5,000
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Annual Rate: 0.750% or 0.00750
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Time: 1 year
Interest Earned in 1 Year = $5,000 * 0.00750 * 1 = $37.50
Now, let’s dive into the difference between simple and compound interest.
Simple interest vs. compound interest: what’s the difference?
Simple interest
Because it’s used in most savings accounts, we covered some details about simple interest in the section above. To recap, simple interest is calculated using only your principal (the money you deposit yourself), so the formula is:
Simple Interest = Principal * Rate * Time
Compound interest
Compound interest, on the other hand, is calculated using your principal and any interest you’ve previously earned on your balance. In other words, it uses your entire account balance, and you earn ‘interest on interest’. This allows for exponential growth over time—rather than the linear growth that comes with simple interest. That’s one reason why investments (that offer compound interest) can be so beneficial alongside traditional savings accounts.
Because you’re earning interest on your principal and interest, the formula for compound interest is a bit more complicated:
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A is the total amount after t years.
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P is the principal
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r is the interest rate expressed as a decimal.
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n is the number of times the interest is compounded per year.
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t is the amount of time in years.
| Year | Value on January 1 | Interest earned (2.5%) | Value on December 31 |
|---|---|---|---|
| 1 | $ 100,000 | $ 2,500 | $ 102,500 |
| 2 | $ 102,500 | $ 2,562.50 | $ 105,062.50 |
| 3 | $ 105,062.50 | $ 2,626.56 | $ 107,689.06 |
| 10 | $ 124,886.30 | $ 3,122.16 | $ 128,008.45 |
| 25 | $ 180,872.59 | $ 4,521.81 | $ 185,394.41 |
Here’s an example that illustrates how a $100,000 investment can grow over time in an account that offers compound interest—at 2.5% compounding annually. Keep in mind, this is how the $100,000 investment grows over time without you adding any more money to the account!
When discussing simple and compound interest, you might also hear the term Annual Percentage Yield (APY). This is the total amount of interest earned in your savings or investment account over one year. If the account offers compound interest, APY considers the compounding frequency to give you a total amount of interest earned in a year.
How do banks pay interest on savings accounts?
Most savings accounts pay interest monthly. Financial institutions will typically calculate interest daily using your closing balance, then add up these daily calculations into one monthly interest payment.
How do banks calculate interest?
Individual banks can set different interest rates for their savings accounts—and they’re always subject to change. Banks consider several factors when deciding their interest rates, such as the Bank of Canada’s policy interest rate (which they strategically adjust to influence the Canadian economy), competitor rates, market conditions and the type of savings account (e.g. high interest savings account vs. regular savings account).
Based on the type of savings account, the bank will either apply a simple interest formula or compound interest formula to calculate the interest you will earn on the money you deposit (your principal). We compare simple interest vs. compound interest earlier in this article, so be sure to check out that section too if you missed it!
How do I grow my savings?
Here are a few tips and best practices to help you grow your savings. Keep in mind that this is not a comprehensive list, and it’s important to come up with a savings plan that you can stick to consistently.
Open a high interest savings account
This is one of the easiest ways to grow your savings ‘in your sleep’. With a high interest savings account , enjoy a higher interest rate on every dollar and watch your savings grow faster than it would in a traditional account (more on that in the section below).
Set up automatic transfers
Most banks let you set up automatic, pre-authorized transfers to your savings account. Automating your savings is one of the best ways to make sure you remember to contribute!
Check in with your financial goals regularly
When building your savings, it’s important to check in on your income, expenses and budget regularly. Can you find new ways to cut down expenses and allocate that money to savings? Can you explore ways to consolidate debt and put the extra money in savings instead?
What is a high interest savings account?
A high interest savings account (HISA) is a unique type of savings account with a higher interest rate than most standard savings accounts—helping your money grow faster.
The benefits of a high interest savings account
Some benefits of a high interest savings account include:
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Growth: Watch your money grow with a higher interest rate earned on every dollar compared to standard savings accounts.
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Access: Enjoy easy access to your money compared to many investment accounts that have withdrawal conditions.
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Security: Feel peace of mind knowing you cannot lose your principal (any money you deposit) because it’s protected by the Canada Deposit Insurance Corporation (CDIC).
How many high interest savings accounts can I have?
In Canada, there’s no limit on the number of high interest savings accounts (HISAs) you can open across financial institutions. However, individual banks may have their own limits.
At RBC, there’s no limit on the number of HISAs you can open.
Do I need to pay taxes on my savings account?
Yes, you typically have to pay income tax to the Canada Revenue Agency (CRA) on the interest you earn in your savings account. Keep an eye out for a Statement of Investment Income (form T5) from your financial institution ahead of tax season. It’ll detail the interest (income) you earned in your bank accounts, and you must include it when you file your personal income tax return.
Other frequently asked questions about savings account interest
Most savings accounts use a simple interest formula to calculate the interest you’ll earn. To recap, the simple interest formula is:
Interest = Principal * Rate * Time
| Definition | Value for This Example |
|---|---|
| Principle is the money you deposit. | $1,000 |
| Rate is the annual interest rate on the account. | 0.750% or 0.0075 |
| Time is how long the money has been in the account. | 1 year |
Interest Earned in 1 Year = $1,000 * 0.0075 * 1 = $7.50
You can play around with this formula by entering different principal amounts, interest rates and time periods to calculate the interest you could earn in various scenarios (to compare savings accounts).
Generally speaking, high interest savings accounts will offer higher interest rates than traditional savings accounts. To determine a ‘good’ rate, we recommend comparing several rates offered by different financial institutions. This is a good rule of thumb (rather than aiming for a specific number) because interest rates are always subject to change based on market conditions.
Yes, high interest savings accounts are very safe! They can help your money grow faster than a traditional savings account, and you cannot lose any money you deposit in the account.
While interest rates can fluctuate, you cannot lose your principal (the money you deposit—this does not include interest earned). Your principal is protected by the Canada Deposit Insurance Corporation (CDIC), a federal Crown corporation that insures eligible deposits and protects your savings in case of a financial institution failure.
Individual banks may have different rules and limitations when accessing the money in your savings account. That being said, you can usually access your money through one (or more) of the following methods.
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Electronic transfers
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Online banking
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ATM withdrawals In person at a branch
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.
