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Learn How Interest is Calculated on Savings Accounts

Why are Interest Rates Increasing?

You may have noticed some commotion recently about an interest rate increase. What’s this all about?

Well, for the past few months the RBA has raised the cash rate, which is the interest banks and financial institutions have to pay when taking out loans. While there were a few reasons for doing this, the main one was to control Australia’s rising inflation rate, which has recently reached 7.1%.

Because of this, banks may be considering increasing their own interest rates to compensate. If you’re a savings account holder, great! Interest rates for savings accounts have been sitting at record lows throughout the pandemic, and we’re finally starting to see some increases.

Savings accounts across the market are already seeing some impacts, with our own Life Saver account’s interest rate recently increasing by 0.50 percentage points. Other account types, such as term deposits and everyday transaction accounts, aren’t quite as quick on the uptake, and it may be a little while longer until they start rising as well.

How is Interest Calculated on Savings Accounts?

Some factors that affect the way your interest is calculated are your account balance, the amount of time your account has been or will be active for, and how often you deposit into your account.

The type of savings account you hold will also affect the way your interest is calculated. Many everyday savings accounts calculate interest daily but pay it out at the end of the month, but there are some exceptions. Term deposits, for example, may calculate interest daily or monthly but will only pay it out at an agreed upon interval such as every six months, or only at maturity (the end of the loan).

Interest Calculated Monthly

An important thing to remember about the way your interest is calculated is that it is normally compounded. But what does this mean for you?

Compound interest means that you earn interest on both the amount you initially deposited (the principal) and on interest you’ve earned.

This can get confusing, so let’s work through an example together.

Let’s say you deposited $10 000 for 5 years, at an interest rate of 3%. Now, let’s say this amount was being compounded monthly, meaning that in every 1-year interest is compounded 12 times.

So, in the first month your interest will be 3% of $10,000, which we then divide by 12. This will give us $25 of interest, which we can add to our original $10,000. The next month, instead of earning interest on $10,000, we’ll earn it on $10,025. In our second month, then, we’ll earn $25.06 of interest, which we can add to our account.

If we continue this process until we reach 60 months, or 5 years, we’ll end up with a total of $11,616.17, meaning we earned $1,616.17 just on interest!

Now that we’ve worked that out, why don’t we compare it with how much we would have earned if we only compounded yearly?

If we compound yearly, in the first year we do 3% of $10,000, leaving us with $300 interest. At the end of the first year then, we’ve got $10,300. In our second year, we take 3% of $10,300, giving us $309, which we can add to $10,300. If we repeat this process until we reach 5 years our total will be $11592.74, meaning we earned $1,529.74 of interest.

We earned $86.43 more in interest by compounding monthly rather than annually for the same amount of time! While these savings may seem small, they can really add up and make a big difference to your finances.  

Interest Calculated Daily

As we mentioned earlier, most savings accounts calculate interest daily and pay out monthly. Calculating daily means that banks will look at the balance in your account each day and calculate based on that, and not just look at what your account has at the end of the month. Because of this, developing a regular and frequent saving habit can really help you make the most of the way your interest is calculated.

Greater Bank

Account Interest Rates, Offers, and Incentives

There are several types of deposit accounts, each with their own benefits. We’ll run through a couple here for you.

Everyday Accounts

Features and benefits

Everyday accounts are great if you want easy access to your money. As the name implies, you can use these for everyday transactions, such as grabbing your morning coffee, doing your weekly shop, or paying for your Netflix subscription.

Some everyday accounts will waive monthly account-keeping fees, resulting in some nice savings for you. We don’t charge a monthly account keeping fee on neither our Access account nor our Ultimate Access account, which we feel makes it easier for customers to manage and maintain their accounts.

Keep an eye out for special offerings, as these can sometimes strike the right balance for you. For example, our Retirement Plus account is a mix between an everyday account and a savings account, as it allows customers to easily access their funds while also offering a higher interest rate depending on how much is kept in the account.


The main disadvantage with everyday accounts is that they often don’t earn interest. Everyday accounts certainly have their benefits, but they aren’t ideal for keeping large amounts of money in them.

Another thing to be aware of is that while some accounts waive monthly account-keeping fees, other fees may still apply. If you already have an everyday account, it’s a good idea to keep tabs on the fees being charged to it.

Savings Accounts

Features and benefits

Savings accounts are sort of in the middle of everyday accounts and term deposits and are good saving tools. They earn more interest than an everyday account, and unlike a term deposit you won’t have to wait for your term to mature or pay a fee to access your money.

Many savings accounts also offer incentives that are worth looking out for. For example, our Bonus Saver account can easily be linked to an everyday account, can be opened as a single or joint account, and doesn’t have monthly account keeping fees.

Some accounts offer special benefits to younger people, so don’t forget to check if you are eligible for youth/young adult accounts. Our Life Saver account, for example, offers a competitive interest rate to those who are under 25 years old, so long as the account keeps growing every month.


The primary disadvantage with most savings accounts is that if your money is moved out to a different account, you may lose the bonus interest you would have been paid. There are some accounts that don’t operate on this system and allow you to access your funds without losing interest, but they generally offer a much lower interest rate.

Another potential disadvantage is that regular savings accounts don’t offer interest rates as high as term deposits, which is an important consideration if you were looking for a high interest account.


Term Deposit Accounts

Features and benefits

Term deposit accounts are especially useful if you’re saving up for a larger or long-term purchase, such as a car or a holiday. They normally have a higher interest rate that can be locked in for the duration of your account, and terms can range from 1 month to 5 years. An incentive to open a term deposit is that deposits totalling under $250 000 are Government guaranteed, which can bring peace of mind.

For most term deposits on the market, the minimum needed to open an account is $5000, but our Term Deposit account can be opened with $1000. Our term deposits also allow you to choose whether you want your interest paid out monthly, six-monthly, or at maturity, providing you with more flexibility.    


The downside of a term deposit is that your money is harder to access as it is locked away for a set period of time. Depending on your account, you may have to pay a significant fee to ‘break’ your term deposit. If are considering a term deposit, it might be a good idea to make sure that you have enough money available in a savings account to cover any unexpected expenses while your term deposit is active.

Another thing to consider is that because your interest rate is locked in, you won’t benefit from an interest rate rise until your term matures, and you can lock in a new rate. 

What Can I do to Manage Rising Interest Rates?

Here are some tips we think may help you make the most of your savings accounts and interest rates:

  • Now might be a good time to think more about your savings, and what you’re aiming towards. You can use our helpful savings goal calculator to track lots of different features such as your starting balance, interest rate, and deposit amounts.
  • While interest rate rises may be benefitting your savings account, it is important to think about how they’re impacting other aspects of your finances. You can use our budget planner to keep an eye on your income and spending, and if you have a home loan you can use our repayment calculator to manage your loan.
  • Doing some more research into which type of everyday or savings or deposit account is right for you and comparing a variety of offers may be worthwhile, as it may get you a better deal. Don’t forget to look our for some of the offers and incentives we mentioned earlier, as they can make a difference on your savings.


This article is intended to provide general information of an educational nature only. This information has been prepared without taking into account your objectives, financial situation or needs. Therefore, before acting on this information, you should consider its appropriateness having regard to these matters and the product terms and conditions. Terms, conditions, fees, charges and credit criteria apply. Information in this article is current as at the date of publication.


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