Investor Facts: What Is Interest Income?

Interest income is any kind of interest earned on accounts at a bank, such as a savings and checking account, a high-yield checking account or a certificate of deposit (CD).

Income from investments comes in several forms. It can be from appreciation, such as when a stock increases in value. Income also can come from dividend payments, which is the portion of a company’s earnings due to shareholders.

Interest income is different. A bank as a business revolves around earning and charging interest. Some customers pay interest on loans such as home mortgages and auto loans. Others earn interest on their deposits in the bank.

For instance, if you open a savings account today you will find that the bank pays you a small amount of income based on the size of your account. The more you keep in the bank, the more interest you will earn.

Checking accounts can pay interest, too, but it’s less common unless the bank is seeking to promote checking to new customers.

Banks often pay more interest for specific types of accounts. For instance, you can open what’s called a high-yield account. These are accounts, usually savings accounts, that pay more than a normal savings account.

High-yield accounts often require a larger minimum deposit to open and sometimes require your balance to remain above a certain level to continue to earn that higher level of interest. These accounts are often used to keep money earmarked for use in the near future, such as paying college tuition, financing a wedding or saving for a vacation.

Other income forms

Banks offer money market funds, which function as a common way to hold money for medium-term goals and which can offer higher interest income than savings accounts. These are different from money market mutual funds offered by a brokerage.

A money market account at a bank is held at the bank, which then invests the capital pooled there and pays interest income to the depositors. A money market mutual fund is an investment in itself which you buy and own. While generally considered “safe,” a money market mutual fund is not insured by the FDIC, while a money market deposit account at a bank is insured.

Most everything else marketed as an “income investment” is in fact an investment in the true sense and not a source of interest income. Dividend stocks, annuities and bonds all pay income to their holders but represent far more risk of loss than most bank deposit products.

Since there’s more risk, naturally the income earned from these investments is higher, typically, than what you would get from a bank. Nevertheless, just because an investment generates income, that doesn’t mean you earned interest from it. Rather, you may have simply made income or, possibly, a gain in value that only becomes income if you sell the investment.

MarketRiders, Inc. is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.