Free lesson · Lesson 14 in the app
Interest: Getting Paid to Save
Why banks pay you to keep money with them, and how interest works.
About 8 minutes · 10-question quiz · Ages 10 and up
Learn
What if someone paid you just for not spending your money? It sounds too good to be true, but a savings account does exactly that. The bank pays you for looking after your money, and this payment is called interest.
Interest is the first way your money can earn more money while you do nothing at all. Your savings stop sitting there doing nothing and start working for you.
What is interest?
Interest is money paid for the use of other money. When you put savings in a bank, you're lending the bank your money, and in return the bank pays you interest.
It works a bit like rent. If you rent out a spare room, someone pays you to use it. Lend your money to a bank and the bank pays you to use that.
Interest is shown as a percentage per year. If an account pays 3% a year, you earn £3 for every £100 you keep there for a year.
Why banks pay interest
Banks pay interest because your money is useful to them. As you saw in Lesson 8, they lend most of it out to other customers.
It works like this:
1. You put £100 in a savings account
2. The bank lends most of it to people buying homes or growing businesses
3. Those borrowers pay the bank interest, say 7%
4. The bank pays you less, say 3%
5. The bank keeps the difference as profit
It's also why notice accounts (Lesson 12) often pay more. If the bank knows you won't take your money out suddenly, it can lend it out for longer.
How much you'll earn
The sum works like this:
- You save £100
- The rate is 5% a year
- After one year: £100 + £5 = £105
Earning interest only on the money you put in is called simple interest.
Three things decide how much you earn:
- The amount: 5% of £1,000 is more than 5% of £100
- The rate: 5% earns more than 2%
- The time: two years earns more than one
Amount, rate and time work together. You can't always change the first two by much, but starting young gives you more of the third.
Interest rates change
Interest rates aren't fixed forever. The Bank of England, which looks after the UK's money system, sets Bank Rate (the news often calls it the base rate). It nudges all other interest rates. When it goes up, savings accounts usually pay more. When it comes down, they usually pay less.
Rates can swing a lot. Around the year 2000, savings accounts often paid 4-5%. For most of the 2010s they paid almost nothing. In the 2020s they rose again.
So the rate you signed up for may not stay the best one around. Check your account now and then, and compare it with others.
Interest is the first step
£5 on £100 won't change your life, but interest is only the beginning.
In the next lesson you'll meet compound interest, where you earn interest on your interest and small amounts can grow into something much bigger.
For now, the main thing to remember is that saving in the right place means getting paid for not spending. Your money can earn money on its own.
Practice
No marks here. Have a think, or talk it through, then open a model answer.
Calculate your interest
You put £300 in a savings account that pays 3% interest a year.
Question: How much interest will you earn in one year? How much will you have in total?
Amount, rate and time decide how much interest you earn. What can you do about each one?
Why banks pay you
Your younger sibling asks: "Why would a bank pay me just for keeping my savings there? What's in it for them?"
Question: How would you explain it?
Try the quiz
Pick an answer to see if it's right, and why.
Question 1 of 10
What is interest?
Question 2 of 10
A savings account pays 3% a year and you have £100 in it. How much interest do you earn in a year?
Question 3 of 10
True or False: Banks pay interest on savings because they are being generous.
Question 4 of 10
What happens to most of the money in your savings account?
Question 5 of 10
Which three things decide how much interest you earn?
Question 6 of 10
True or False: The interest rate on an easy access savings account stays the same for as long as you keep it.
Question 7 of 10
Who sets Bank Rate, which nudges UK savings rates up and down?
Question 8 of 10
You save £500 at 4% a year. How much interest do you earn in one year?
Question 9 of 10
Why do notice accounts often pay more interest than easy access accounts?
Question 10 of 10
Interest is most like which of these?
10 questions. Nothing is saved, so have a go.
Where a lesson mentions another lesson by number, the free ones are linked. The rest are in the app.
Keep going in the app
In Squids-In, children work through 160 short lessons like this one, in order, alongside a friendly investing game. You can see how they're getting on. It's free while we test it with a small group of families.