Interest earned on a savings account is typically calculated on what basis?

Interest earned on a savings account is commonly calculated on a daily basis. This approach means that the bank assesses the interest for each day that funds are available in the account, which allows for more accurate and potentially higher earnings over time compared to methods that calculate interest less frequently.

When interest is calculated daily, it compounds over time, which can significantly increase the total interest earned compared to monthly or annual calculations. This compounding effect occurs because interest is added to the principal, and future interest calculations include this added interest.

Banks often use the daily balance approach, where interest is accrued based on the amount present in the account each day. This not only benefits the account holder by maximizing potential earnings but also aligns with the financial practices of many institutions, which think in terms of daily operations, thus making daily interest calculation a practical choice.