When you lend money, by putting it in a savings account or buying a bond, you earn interest in return. It’s the same concept as interest on a loan, just flipped: instead of you paying it, someone’s paying it to you. The amount you earn is expressed as a percentage of what you put in. A savings account paying 4% interest means you’d earn about $40 a year on every $1,000 you keep there. And it ripples through the whole economy in ways that affect your investments more than you might expect. Even more about earning interest on your savings and investments in Don’t Let Your Cash Sit Around Doing Nothing.
Walk through the numbers
A savings account paying 4% interest pays about $40 a year for every $1,000 you keep there. A bond fund paying 4.5% pays about $45 a year per $1,000.
Interest is one of the ways your money pays you, alongside dividends and rent from real estate.
Related terms
For education only and not personalized investment advice. Examples are hypothetical illustrations, not a prediction or a promise of results. All investing involves risk, including the possible loss of principal.