Banks and Savings Interest Rates

Banks can pay interest on deposits but the role it plays in personal finances is often misunderstood. Savings interest is less about growth and more about bank storage, access, and stability.

Understanding how bank interest works clarifies why rates are low, and why banks are not designed to be long-term growth engines.

Because those rates are so low, it's not really about the usual benefits of compounding. Interest deposits are compounding but they produce modest results.

Why Savings Rates Feel Low

Bank savings rates are influenced by funding sources. When deposits are plentiful, banks have less incentive to raise rates. Banks rightly prioritize stability and liquidity, therefore savings rates tend to move slowly and remain below rates associated with riskier assets.

What a Bank Account Is Designed to Do

Bank accounts serve as a safe place to store money, to provide liquidity and easy access for short-term and transactional needs. They are not designed to maximize returns. The tradeoff for safety and access is lower yield.

Bank accounts tend to hold money for immediate, shorter-term expenses and payments. Money intended for longer time horizons (saving for a house or car, investing for retirement), long-term accumulation tend to be stored in other account types.

If I need the money soon or might need it unexpectedly, it belongs in a bank account — the rate doesn’t matter much.