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.
• The advertised rate on a savings account is usually a small base rate plus a conditional bonus rate, and in most accounts missing one monthly condition (a withdrawal, a missed deposit) means base rate for that whole month.
• Introductory rates last a set number of months and then drop to the ongoing rate, so diarise the end date and check what the rate becomes.
• Emergency money has to be available the day something breaks, so the access terms and the rate conditions you can genuinely keep are the things to check – and while you're paying off expensive debt, the debt rate matters more than the savings rate.

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 where the money you keep for emergencies should sit.

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

The big number in the ad is usually two rates added together: a base rate, often well under 1%, and a bonus rate you earn by meeting conditions during the month. The conditions differ between accounts, however the common ones repeat across the market: grow your balance by the end of the month, deposit a minimum amount, make a set number of transactions on a linked everyday account, or make no withdrawals at all.

The conditions reset every month, and in most accounts missing a single one means the whole month's interest is paid at the base rate.

One missed condition usually means 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. In a tight month, you may be more likely to break the no-withdrawals condition because that's exactly when you need the money out. That's worth knowing when you're choosing the account rather than after: if your months are unpredictable, an account with conditions you'll meet even in a bad month may earn you more over a year than a higher advertised rate you keep missing.

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.

Diarise the end date the day you open the account (a phone reminder does the job). When it comes around, check what the ongoing rate becomes, because that's the rate you'll be earning from then on. And if it doesn't compare well with what you could earn elsewhere, moving your savings is completely fine.

Credit cards run a version of the same structure with their promotional interest rates, and the habit that protects you is the same one: know the date the rate changes, and what it changes to.

Where should your buffer actually sit?

Emergency money has to be available the day something breaks. That makes two things worth checking before anything else: the access terms (term deposits and notice accounts restrict access for a set period, so money in them can't come out the day you need it), and whether the bonus conditions are ones you can genuinely keep (a bonus condition you can't realistically meet is worth less than a slightly lower rate you'll actually earn). A no-withdrawals bonus condition is worth thinking about here too: a buffer gets drawn on in exactly the months that go wrong, so the month you use it would also be a month the account pays the base rate. That's a small cost next to what the buffer protects you from, however it's better to know that before you pick the account.

If you're building that buffer while paying off debt, we've gone through how to run both at once in our guide to building an emergency buffer while paying off debt, including why the first few hundred dollars do most of the protective work. While you're carrying expensive debt, the savings rate also matters less than the debt rate: on a starter buffer the difference between accounts is a few dollars a month, and the buffer is there to stop the next surprise landing on credit rather than to earn a return.

Take 5 minutes to open your last savings statement, find the interest line, and see whether last month paid you the full rate or the base rate. One base-rate month is usually just a miss, however base rate most months means the conditions don't fit the way your money moves, and an account with simpler conditions might leave you better off.

Pro tip: Once your accounts are connected in WeMoney, you can see what your savings actually earned last month next to what your debts cost over the same month, all in one place – giving you the comparison to use when you're deciding where spare money goes next.

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.