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What is Cash Interest?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 24 August 2016
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Cash interest is the amount of cash that accumulates on an interest bearing account over time and is eventually paid out to the investor who owns that account. The rate at which the interest accrues depends on the structure of the account itself and the rate of interest that is applied to the balance found within that account. Interest accounts may be structured to provide cash interest based on a fixed interest rate, or on a rate that floats or varies based on the current prevailing interest rate in the nation where the account is based.

There are several factors that will impact the amount of cash interest that is generated. One has to do with the current balance found in the account. This is because the interest is calculated based on the amount of funds found in the account in question. Typically, the higher the account balance that is present in the account on the date that the interest is calculated, the higher the amount of interest that is earned on that balance.

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Along with the account balance, the rate of interest that is relevant to the account will also impact the amount of cash interest that is realized. Some interest bearing accounts are structured with a fixed rate of interest that remains the same from one year to the next. This approach makes the accounting process very simple, since the account balance is multiplied by the interest rate in order to determine how much interest the account holder has earned for the most recently completed accounting period. Other accounts are structured with a variable or floating rate of interest that is based on the national average interest rate that currently prevails within the economy. Often, this variable rate is within a couple of points of that national average rate and will shift slightly from one accounting period to the next.

Cash interest payments may be forwarded to the account holder in a couple of different ways. One approach is to actually issue the holder a check or similar financial instrument for the amount of interest accrued during the most recently completed period. Another approach is to deposit the cash interest directly into the interest-bearing account, a strategy that helps to incrementally increase the balance of that account for the future. In both scenarios, there is a good chance that the cash interest is taxable, making it necessary to account for the exact amount when filing taxes with national and local tax agencies.

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letshearit
Post 3

When it comes time to do your taxes does financial reporting get more difficult when you are receiving cash interest from your accounts?

I am not sure whether to report my interest earned as income or not. I have a very low rate of return on my savings. While I do make a bit of money of the accounts the amount really isn't very much. In general I like to do my own taxes to save on money so I am trying to avoid making filling out my forms any more difficult. Does anyone have experience reporting interest as income earned?

manykitties2
Post 2

@popcorn - You should be able to find some sites online that offer comparisons of interest rates with all the big banks. From what I can tell ING Direct has some really good rates, though it depends on your needs.

Another good idea is to call your own bank and see what they offer in terms of savings accounts. I have a great online savings account and while it has some restrictions the interest rate is very good. I also like that I can move my money between accounts online without being penalized for the transactions. I just can't withdraw from the account with an ATM because it costs $5 a withdrawal.

popcorn
Post 1

Does anyone know how to find the best cash interest rate on a savings account?

I have recently started saving for the long term and feel that if I can generate some interest on my money that I will be better off financially. I am hoping to be able to pay for my next vacation without having to touch any of my credit cards.

I figure that the the trend of actually living within your means has got to be better than swimming in debt. I want to avoid doing that again if I can. Nothing worse than watching your pay disappear on bills.

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