How Is Savings Account Interest Calculated?

Savings account interest is usually based on three things:

1. your balance

2. the interest rate

3. how long the money stays in the account.

In Canada, many high interest savings accounts use an annual interest rate, calculate interest using your daily closing balance, and then pay the interest monthly.

The basic idea

A simple way to estimate one day of interest is:

daily interest = balance × annual rate ÷ number of days in the year

So if you had $1,000 in a savings account with a 2% annual rate, a rough daily estimate would be:

$1,000 × 0.02 ÷ 365 = about $0.055 per day

Over 30 days, that would be about $1.64 before rounding differences. This is an estimate, not a universal rule, because institutions can use different methods, different rate tiers, and a 366-day year in leap years.

Accounts also usually pay interest based on your actual daily balance, not one flat monthly number.

Why the amount can change from month to month

Your interest may go up or down because your balance changes during the month. If you deposit money, withdraw money, or move money in and out, your daily closing balance changes too.

Since many accounts calculate interest daily, even small balance changes can affect the amount paid at month-end.

The interest rate can also change. Some savings accounts have a regular rate, while others have a promotional rate for a limited time. Some accounts also pay different rates depending on your balance.

Not every account applies rates the same way

This part matters.

Some accounts apply one rate to your entire balance based on the balance tier you fall into. Others apply different rates to different portions of your balance. Bank disclosures show both approaches exist.

That means two accounts with similar advertised rates may still calculate interest differently.

What about compounding?

Savings accounts may compound interest monthly or daily, and accounts that compound daily earn interest faster than accounts that compound monthly. Compounding means you start earning interest on interest that was already added to the account.

In simple terms, compounding helps your savings grow a bit faster over time, especially if you leave the money in the account.

What should you check?

Before relying on a savings rate, look at:

• whether the rate is annual

• whether interest is calculated on the daily closing balance

• how often interest is paid

• whether the account uses balance tiers

• whether the rate is promotional or ongoing.

What to Remember

Savings account interest is usually calculated from your balance and annual rate over time, often using your daily closing balance and then paying the total monthly.

The exact amount you earn can change based on your balance, the account terms, tiered rates, promotional rates, and how often the account compounds interest.