What is a high interest savings account?
Before we dive into the details of what happens to the interest earned, let's first understand what a high interest savings account is. A high interest savings account is a type of savings account that offers a higher interest rate compared to traditional savings accounts. These accounts are usually offered by banks and other financial institutions and are designed to help individuals grow their savings at a faster rate. The interest earned on these accounts is typically calculated on a daily or monthly basis and is added to the account balance.
Option 1: Reinvestment
One option for handling the interest earned in a high interest savings account is reinvestment. With this option, the interest earned is automatically reinvested back into the account. This means that the interest continues to compound and generate more interest over time. Reinvestment can be a great strategy for individuals who are looking to maximize their savings and let their money grow. By reinvesting the interest earned, you are effectively earning interest on your interest. However, it's important to note that not all high interest savings accounts offer automatic reinvestment. Some accounts may require you to manually reinvest the interest or provide other options for handling the earned interest.
Option 2: Payout
Another option for handling the interest earned in a high interest savings account is a payout. With this option, the interest earned is paid out to the account holder either on a regular schedule (e.g. monthly or quarterly) or upon request. Choosing the payout option allows you to access the interest earned and use it for other purposes, such as covering expenses or investing in other opportunities. This can be beneficial if you need the additional funds or prefer to have more control over your savings. However, it's important to consider the potential impact on your overall savings strategy. If you choose to have the interest paid out, you may miss out on the opportunity to compound and grow your savings at a faster rate.
Option 3: Combination
Some high interest savings accounts offer the option to combine reinvestment and payout. With this option, you have the flexibility to choose how much of the interest earned is reinvested and how much is paid out. For example, you may decide to reinvest a portion of the interest earned to continue growing your savings, while also having a portion paid out for immediate needs or expenses. This allows you to strike a balance between maximizing your savings and having access to funds when needed. The specific terms and options for combination may vary depending on the financial institution and the high interest savings account you have. It's important to review the account terms and speak with a representative to understand the available options.