How savings interest and bonus rates actually work

Key points

• Savings interest is calculated on your daily balance and usually paid monthly: $1,000 at 4.75% (illustrative) earns ~$4 a month.
• Many savings accounts combine a base rate with a conditional bonus rate. If a condition is missed, the rate paid for that month depends on the account's terms.
• Introductory rates last a set number of months and then drop to the ongoing rate. The product terms state the end date and the rate that follows.
• Emergency savings products can differ in their access terms, interest conditions and fees. Savings and debt products can also have different rates, balances and tax treatment.

The rate on a savings account ad and the rate your money actually earns can be a long way apart. The conditions that decide which rate you get are published with the account, however they're easy to miss when you sign up, and easy to break in an ordinary month. So here we go through how savings interest is worked out, the difference between the base rate and the bonus rate, what happens when an introductory rate ends, and how access and rate conditions affect emergency savings.

How is savings interest actually calculated?

On your daily balance, usually paid monthly (a few accounts do it differently, so the product page is worth checking). The advertised rate is a yearly figure, and the bank divides it across the days of the year. Each day, your closing balance earns that day's share, and once a month those daily amounts are added up and paid into the account. At 4.75% (illustrative), $1,000 earns about 13 cents a day, which lands as ~$4 when the month's interest is paid (a little more in 31-day months, a little less in February).

The daily part matters in practice. Money starts earning the day it arrives and stops the day it leaves, so a deposit that lands on the 28th earns only a few days of that month's interest, and money you move out on the 3rd earns almost none of it. None of this needs managing day to day, however it explains why the interest paid can change from month to month even when the rate hasn't.

Base rate vs bonus rate: what voids the bonus

Many savings accounts advertise a total rate made up of a base rate and a conditional bonus rate. The conditions differ between accounts, however common examples include growing your balance by the end of the month, depositing a minimum amount, making a set number of transactions on a linked everyday account, or making no withdrawals at all.

The conditions reset every month. For many accounts, missing a condition means the base rate applies for that month, but the treatment varies, so check the account terms.

Depending on the account terms, one missed condition can mean the base rate for the whole month, not just for the day you missed it.

Below is what that gap looks like on a $5,000 balance (illustrative):

That's about $18.50 of difference in one month, from one withdrawal or one missed deposit. Account terms can produce different outcomes depending on whether the conditions are met. Relevant comparison factors include the ongoing rate, bonus conditions and what happens when a condition is missed.

Intro rates that revert

Separate from the monthly bonus, some accounts offer an introductory rate: a higher rate for the first few months after the account opens, which then drops to the ongoing rate, and the ongoing rate can be a lot lower. The end date is published in the product details from the start, however it's the kind of detail that's easy to forget by the time it arrives.

The product terms state when an introductory rate ends and the ongoing rate that follows. The ongoing rate can be compared with other accounts using the rate, conditions, access arrangements and fees.

Credit cards run a version of the same structure with their promotional interest rates. The product terms state the date the promotional rate changes and the rate that follows.

How access and rate conditions affect emergency savings

Savings products differ in their access terms and interest conditions. Term deposits and notice accounts restrict access for a set period. Some savings accounts apply a different rate when a withdrawal is made or another bonus condition is not met. The product terms explain when funds can be accessed, which conditions apply and how the interest rate changes.

Our guide to building an emergency buffer while paying off debt explains the mechanics of maintaining emergency savings while repaying debt. Savings and debt products can have different rates, fees and balances. These figures can be compared, but the comparison does not determine which product or debt a person should prioritise.

A savings statement can show whether the full rate or base rate was paid for the month. Repeated base-rate months may show that the account conditions were not met. The statement and product terms explain which rate applied and why.

Pro tip: Once eligible accounts are connected, WeMoney can display savings interest and debt costs for the same period. This is general information and does not recommend how spare money should be allocated.

Sources

• Moneysmart: Savings accounts

This article provides general information only. It does not take your personal circumstances into account and is not financial, credit or legal advice. Consider your own situation and seek advice from a suitably qualified professional if you need it.