Savings accounts are accounts where customers save a part of their money for a specific period and earn interest on that money each month, as long as the money is in the bank. These accounts are maintained by commercial banks and credit unions. Keeping some money aside in a savings account with a bank is a great way of saving for the ‘rainy day’, saving for a planned occasion like a wedding, education or even retirement.
How Secure is Your Money in a Savings Account?
The purpose of depositing money in a savings account is also for security reasons. Keeping money in a bank savings account is safer as there is no risk of robbery or burning down of the house. Money in a bank or credit union is kept in a locked fireproof safe. This money is also insured up to $100000 per depositor through FDIC (the Federal Deposit Insurance Corporation). The FDIC is an independent federal government agency that was created in 1933 by the United States government due to the hundreds of bank failures. With the FDIC security, even if a bank goes out of business, the customers’ money is always safe. Since the inception of FDIC, there has not been a single person that lost money with a bank that is FDIC insured.
Types of Savings Accounts
There are two types of savings accounts that banks offer interest on.
The Basic Savings Account and the Money Market Account.
The Basic Savings Account (the passbook savings account) usually carries a minimum balance requirement and offers a low bank interest rate. Most banks allow depositors to withdraw money from their basic savings account whenever they want.
The Money Market Account is a high yield savings account that pays more interest. This high yield money market account also requires a higher minimum deposit and a particular balance to be maintained in the account at all times. This amount differs from bank to bank. There may also be a restriction on the number of withdrawals in a month and also restriction on the number of checks issued in a month. The reason for this is obvious. Banks encourage depositors to leave their money in the bank and earn the best money market rates.
High Yield Savings Accounts
The bank interest rates vary from bank to bank. The best savings accounts are those that offer a higher bank interest rate. It is up to the customer to check out the bank that offers higher bank interest rates, as the main purpose of a savings account is to watch money grow. The savings accounts that earn a higher rate of interest are called, “high yield savings accounts.”
Why do Banks Pay Interest
Everyone knows that they earn interest, but how many really understand how it all works and how the money in a high yield savings account actually grows or why banks pay interest?
The reason banks are able to pay money (interest) on the money deposited in a savings account is because they use this money to give loans to people. They charge a higher rate of interest from the people availing these loans, than the bank interest rates they pay the savings bank depositor. The difference in the interest they charge on a loan and the interest they pay the depositor is their income. This way, the depositor is benefited and the bank is earning huge sums of money.
How is Interest Calculated?
Interest is usually compounded daily and is paid on a monthly basis. This means that if $1000 is deposited in a savings account and the interest earned is $1 for the first day, this dollar is added to the $1000 in the account, and the next day interest is calculated on $1001. This is called compounded interest. This means that the bank pays interest even on the interest earned. This shows how important it is to find the best high yield savings account that offers good bank interest rates.
Incentives Offered on Savings Accounts
Apart from high bank interest rates, some banks also offer incentives for saving a particular amount of money for a period of time, either a month, a year or whatever the period may be. These are usually high yield money market accounts where the depositor gets paid for not touching the money.
Some banks have created a “Keep the change” feature. Account holders can choose to opt for this and every purchase made by them is rounded off to the nearest dollar. This difference in amount is then saved in their savings account. This may seem small but is a great way to save.
Withdrawal of Funds from a Savings Account
As far as withdrawing funds from a savings account is concerned, it has to be done either through an ATM or by visiting the bank branch. Usually savings accounts do not provide check facility; although many banks these days call their high yield demand accounts as “savings accounts.”
There are a few banks that have a fixed period of time that funds need to be kept deposited before withdrawing, but most banks allow customers’, ‘complete access’ to their savings accounts.
However, withdrawals from a savings account can sometimes prove to be expensive in more ways than one. If the customer has been using an ‘online’ account and wishes to make a withdrawal, it takes time for the funds to be cleared by the Automated Clearing House for transfer to a brick-and-mortar bank, from where it can be accessed. During this time, the depositor does not earn any interest. In some countries like the UK, there is an account called “notice deposit,” where a small interest is paid with the condition that a 90 day withdrawal notice is given by the depositor before withdrawing the funds. These accounts are not found in North America, where “instant withdrawal” is the way to go, without having to give a notice.
In the United States, a savings account holder is allowed to make up to six withdrawals or transfers per month. They may be authorized to make three of these six transfers using a check, debit card, draft or some such order drawn by the depositor in the name of a third party.
Advantages of an Online Saving Account
With the internet coming of age, banks have acted fast in catching up with the revolution and more and more banks have started going online, wooing customers with their internet banking facilities. What better can the customers ask for, than the convenience of operating their banking affairs from the comfort of their homes or offices or even hotel rooms in an alien country. These virtual banks offer high yield savings accounts and top bank interest rates, which cannot be compared to the traditional brick-and-mortar bank. Banks are able to offer top bank interest rates due to their savings on a traditional set up, including overheads, customer service and computer systems. This increase in online-only high yield savings accounts has prompted many a storefront bank to increase the bank interest rates to compete.
Other Features of a Savings Account
All banks offer the savings account holders a traditional passbook. All the transactions in a particular month are noted in this passbook, including the beginning balance. This helps the customer keep track of the balance in the account. The bank will also send a statement of transactions to the account holder through a bank statement, which includes the number of withdrawals and deposits.
Choosing the Right Bank
There are a few things one must keep in mind, when looking to open a high yield savings account. Many banks may not mention them upfront, but one should ask for a detailed list of all the fees and service charges involved. It is wise to read between the lines for any hidden charges and clarify with the bank. The minimum balance requirements need to be understood to avoid being surprised later. The most important thing that should be clear is the interest rate that is being paid.
Finding a bank that allows direct deposits from the paycheck also helps those people that cannot save money voluntarily. People’s needs vary and each person should be able to assess their financial commitments and how much they can save for a comfortable life ahead. Finding a high yield savings account is the key, where the money grows big with small deposits. There are many banks that offer great bank interest rates, all one needs to do is do some research and compare.