If you’re focused on saving this year, you probably want to know how much interest you can realistically earn. Below, we’ll explore how much $10,000 in savings can earn you in a year and what factors affect your returns.
Before you can estimate how much interest your savings will earn, you need a few key pieces of information:
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APY: One of the most important factors that determines how much interest you earn on your savings is the account’s interest rate, which represents how much you earn on your deposits, expressed as a percentage. But a more useful measure of your earnings is the APY (short for annual percentage yield). This represents the actual earnings on your total balance over a year, including principal deposits and compound interest.
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Composite frequency: This refers to the number of times per year that interest is calculated and credited to your balance. Depending on the account, interest may be compounded annually, semiannually, quarterly, monthly, or daily. The more often your interest accrues, the faster your balance grows.
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Timeline: How long do your savings have to grow? The longer your money stays in an interest-bearing account, the more time it has to accumulate interest.
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Fixed versus variable interest rate: Interest rates can be fixed or variable. A fixed interest rate remains the same for a given period, so its returns are predictable (this is common with certificates of deposit). On the other hand, a variable interest rate can change at any time based on broader market conditions, such as changes in the federal funds rate. This means your earnings can increase when rates rise, but can also decrease if rates fall, which is typical of high-yield savings accounts and money market accounts.
Let’s say you have $10,000 to save and you’re wondering how much interest you can earn based on current interest rates. Below is how much interest you would earn over a year, depending on your account type and typical APY. (Note: For simplicity, we use annual compounding and assume that the APY does not change during the year.)
|
ACCOUNT TYPE |
EXAMPLE APY |
INTEREST EARNED (1 YEAR) |
FINAL BALANCE |
|---|---|---|---|
|
Traditional savings account |
0.05% |
$5 |
$10,005 |
|
High Yield Savings Account |
4% |
$400 |
$10,400 |
|
money market account |
3% |
$300 |
$10,300 |
|
1 year CD |
3.5% |
$350 |
$10,350 |
|
American savings bond |
2.5% |
$250 |
$10,250 |
As you can see, interest earnings largely depend on the type of account you choose and the rate you get. So if you’re deciding where to put your money, here’s a closer look at some common high-yield savings vehicles, how they work, and their pros and cons.
A high-yield savings account (HYSA) is an alternative to a traditional savings account; The only real difference is the amount of interest you can earn. Currently, the best HYSAs earn up to approximately 4% APY. Meanwhile, many traditional savings accounts earn only 0.01% to 0.05%.
For the most part, you can withdraw money from your HYSA whenever you want, making it a good place to store your emergency fund. However, interest rates are variable and can change at any time.
Advantages:
Cons:
A certificate of deposit (CD) is a time deposit that pays fixed interest on your money for a set period of time (known as a term), which can range from one month to several years. CD and HYSA rates are usually quite similar, although CD rates can vary widely depending on the term.
However, unlike savings accounts, which generally allow you to deposit and withdraw money whenever you want, CDs are more restrictive. If you want to withdraw part of your initial deposit before the term of your CD ends, you will pay an early withdrawal penalty.
As of this writing, the best CDs earn around 4% APY.
Advantages:
Cons:
A money market account (MMA) combines certain features of HYSAs and checking accounts. While your MMA balance earns competitive interest as it would in a HYSA, the account is generally more affordable. For example, it may come with a debit card or checks for easy withdrawals.
However, a possible disadvantage is that MMAs may have higher minimum balance requirements compared to other account types.
Currently, the best MMAs earn between 3.75% and 4% APY.
Advantages:
Cons:
A bond is a short-term security sold by governments or corporations. When you buy a bond, you are lending money to the bond issuer in exchange for regular interest payments. If you hold a bond to maturity, you get all of your principal back. Additionally, interest on municipal bonds is typically exempt from federal income tax.
Unlike insured savings accounts, bonds always carry a risk of default by the issuer, although they are generally considered low-risk investments. Additionally, if you sell a bond before maturity, you may not receive its full face value.
Read more: Bond vs. High Yield Savings Account: Which is Better?
Bond rates vary depending on the type. As of this writing, Series EE bonds are earning 2.5% and Series I bonds are earning 4.03%.
Advantages:
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Interest may be exempt from certain taxes.
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Predictable and regular interest payments
Cons:
Treasury bills (T-bills) are a type of bond issued by the United States government. Instead of paying interest on a regular basis, you purchase a Treasury bill at a discount and receive its face value when it matures. Terms vary from four to 52 weeks.
Like a CD, Treasury bond rates are fixed, so you know exactly what return you’ll get when you buy a Treasury bill. And since these bonds are issued by the federal government, they are generally very safe investments.
Read more: CDs vs. Treasury Bills: Which is Better to Maximize Your Savings?
Treasury bill yields are based on the difference between the purchase price and face value. Your earnings also depend on the term of the Treasury bill and whether or not you hold it to maturity.
Advantages:
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Predictable earnings
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Extremely low risk
Cons: