Interest earnings come from letting a bank or lender use your money, and you get paid a percentage of what you lend them

When you put money in a savings account, certificate of deposit (CD), or bond, you are lending that money to a financial institution or government. In return, they pay you interest — a percentage of your balance. The amount you earn depends on three things: how much money you deposit, what interest rate the account or product offers, and how long you leave the money there.

The simplest way to earn interest is to open a savings account at a bank or credit union. You deposit money, and the bank pays you a small percentage each month or year. A high-yield savings account pays more interest than a regular savings account, though the rate changes based on what the Federal Reserve does with its benchmark rate. CDs lock your money away for a set time — three months, one year, five years — and pay a higher rate in exchange. Bonds work differently: you lend money to a government or company, they promise to pay you back with interest at a specific date, and you can sometimes sell the bond before that date if you need the money sooner.

Key Takeaways

  • Interest rates on savings accounts and CDs vary by bank and change when the Federal Reserve adjusts its benchmark rate, so comparing offers across institutions matters.
  • High-yield savings accounts currently pay more interest than regular savings accounts, though both are FDIC-insured up to $250,000 per depositor per bank.
  • Certificates of deposit lock your money for a set period and pay a fixed rate, but you lose some or all of the interest if you withdraw early.
  • Bonds issued by the U.S. Treasury (Treasury bills, notes, and bonds) are backed by the government and sold directly through TreasuryDirect with no fees.
  • The longer you leave money in an account or the higher the interest rate, the more interest you earn, especially when interest compounds monthly or daily.

How savings accounts and high-yield savings accounts work

A regular savings account at most banks pays very little interest — often less than 0.01 percent per year. A high-yield savings account at an online bank or credit union pays significantly more, though the exact rate changes. As of early 2024, some high-yield accounts paid around 4 to 5 percent annually, but this varies by institution and shifts when the Federal Reserve changes rates. You can move money in and out whenever you want, and your deposits are insured by the FDIC (Federal Deposit Insurance Corporation) up to $250,000.

To open a high-yield savings account, you visit a bank's website, provide your name, address, Social Security number, and initial deposit amount, and the account opens within days. You can then deposit more money or withdraw it anytime without penalty. The bank calculates interest daily or monthly and adds it to your balance. Because interest compounds — meaning you earn interest on your interest — your balance grows faster the longer you leave it untouched.

Certificates of deposit (CDs) and their trade-offs

A CD is a contract between you and a bank. You agree to leave a sum of money (the principal) with the bank for a fixed period — called the term — which might be three months, six months, one year, three years, or five years. In exchange, the bank pays you a higher interest rate than a savings account offers. The longer the term, the higher the rate is usually (though not always). When the term ends, you get your principal back plus all the interest earned.

The catch is that if you withdraw your money before the term ends, you pay an early withdrawal penalty. This penalty varies by bank and term length — it might be three months of interest, six months of interest, or a flat fee. Some banks charge more for longer-term CDs. This means a CD only makes sense if you know you will not need the money during the term. If you have an emergency and withdraw early, the penalty can wipe out most or all of your interest earnings.

To open a CD, you go to a bank's website or branch, choose a term length, deposit your money, and the account is set. You cannot add more money to that CD later (though you can open a new one). When the term ends, the bank either returns your money to a linked account or automatically renews the CD at the current rate — check the bank's policy before opening.

U.S. Treasury bonds, bills, and notes

The U.S. government borrows money by issuing Treasury securities. When you buy one, you lend money to the federal government and receive interest payments. There are three main types: Treasury bills (T-bills) mature in four weeks to one year, Treasury notes mature in two to ten years, and Treasury bonds mature in 20 or 30 years. The longer the maturity, the higher the interest rate (called the yield) is usually.

You can buy Treasury securities directly from the U.S. Department of the Treasury through TreasuryDirect, a free online platform. You open an account, fund it with a bank transfer, and purchase the securities you want. There are no fees, no middleman, and no minimum purchase amount (though some securities have a $100 minimum). The government pays interest twice a year, and when the security matures, you get your principal back.

Treasury securities are backed by the full faith and credit of the U.S. government, so the risk of the government failing to pay you back is extremely low. However, if you need to sell a Treasury security before it matures, you must sell it on the secondary market (through a broker), and its price may be higher or lower than what you paid depending on interest rate changes. If rates have risen since you bought it, the price falls; if rates have fallen, the price rises.

Money market accounts and money market funds

A money market account is a hybrid between a savings account and a checking account. It pays interest (usually higher than a regular savings account but lower than a high-yield savings account), allows you to write checks or use a debit card, and is FDIC-insured up to $250,000. The trade-off is that some banks limit how many withdrawals you can make per month, and the interest rate can change at any time.

A money market fund is different — it is a type of mutual fund that invests in short-term debt issued by governments and large companies. It is not FDIC-insured, but it is considered very low-risk. Money market funds pay interest (called a yield), and you can usually withdraw your money whenever you want. They are useful if you have a large sum you want to keep safe and earning interest while you decide what to do with it.

How interest compounds and grows your money over time

Compounding means you earn interest on your interest. If you deposit $1,000 in an account that pays 5 percent interest per year and compounds daily, the bank calculates interest every day on your current balance (which includes yesterday's interest). After one year, you have more than $1,050 because you earned interest on the interest that was added earlier in the year. After five years, the difference between daily compounding and annual compounding becomes noticeable.

The frequency of compounding matters. An account that compounds daily grows faster than one that compounds monthly, which grows faster than one that compounds annually — even if the interest rate is the same. When you compare accounts, look for the annual percentage yield (APY), which accounts for compounding and tells you the true annual return. An account advertising 5 percent APY will earn you more than one advertising 5 percent annual interest rate if the latter compounds less frequently.

Time is your biggest advantage. The longer you leave money untouched, the more interest compounds. Doubling your deposit or doubling the time you leave it in the account does not double your earnings — compounding means the growth accelerates. This is why starting to save early, even with small amounts, can lead to much larger balances over decades.

Comparing interest rates across banks and products

Interest rates vary widely between banks and change frequently. A high-yield savings account at one online bank might pay 4.5 percent while another pays 5.0 percent — that 0.5 percent difference compounds over time and matters on large balances. CD rates also vary by bank and term length. Treasury rates change daily based on demand and Federal Reserve policy. To find the best rate for your situation, use comparison websites that list current rates across multiple institutions, or visit bank websites directly.

When comparing, also check what the bank requires to open an account (minimum deposit, account type, direct deposit), whether there are monthly fees, and how the bank handles interest payments. Some banks pay interest monthly, others quarterly or annually. A bank that pays monthly gives you more frequent compounding, which is a small advantage. Also verify that the bank is FDIC-insured (for accounts) or that the Treasury securities are backed by the government (for Treasuries).

Frequently Asked Questions

How much money do I need to start earning interest?

Most banks have no minimum deposit requirement, though some require $100 or $500 to open a high-yield savings account or CD. Treasury securities sold through TreasuryDirect have no minimum. Even $100 in a high-yield savings account earning 5 percent annually will earn $5 per year, which compounds over time.

Can I lose money if I put it in a savings account or CD?

No, as long as the bank is FDIC-insured and your balance stays under $250,000. The FDIC guarantees your principal. With a CD, you can lose interest if you withdraw early and pay a penalty, but your principal is protected. Treasury securities backed by the U.S. government carry virtually no risk of default, though their market price fluctuates if you sell before maturity.

What happens to my interest if interest rates fall?

If you have a CD or Treasury security with a fixed rate, your rate does not change — you keep earning the same amount until it matures. If you have a savings account or money market account, the bank can lower your rate, and it usually does when the Federal Reserve cuts rates. This is why locking in a CD rate when rates are high can be smart.

Is it better to put money in a CD or a savings account?

A CD pays more interest but locks your money away. Choose a CD if you know you will not need the money for the term length and want a higher may provide rate. Choose a savings account if you might need the money sooner or want flexibility. Some people split the difference by opening multiple CDs with different maturity dates so money becomes available at different times.

How do I report interest earnings on my taxes?

Interest you earn from savings accounts, CDs, and Treasury securities is taxable income. Banks and the Treasury send you a Form 1099-INT each January listing the interest you earned in the previous year. You report this on your tax return. The tax rate depends on your overall income and tax bracket.