Did you know that a savings account is the most common of all bank account types? It is possibly the very first account you have ever made in a bank, as most people do. Savings account comes with many benefits. For instance, it allows you to keep your funds safe with the bank where it earns a bit of interest each month.
These savings accounts are also beneficial as these do not require you to keep a large minimum balance. However, this does depend on the bank and its type of account, as well on the interest rates on savings accounts.
When you put money in a savings account, you are less likely to go on a spending spree. That’s because most such accounts have a rule that you cannot extract funds before a given time, or else you forfeit the future interests. But it is much better than keeping all that money at home. What if your home is robbed one day and all the money's gone? Keeping your funds with the bank means that it is as safe as it can be. Your money is kept in locked, fireproof safes.
Banks insure your money, up to a certain amount through a government body. This means that even in case the bank closes business, which is very rare, your money won’t be lost. Again, when you put money in a bank’s saving account, it gets interest. This interest is given by the bank so that it can use your money for various financial activities.
You open a savings account.
The bank gives you interest on your deposited money
The bank loans your money to other people at a higher rate of interest.
So you now see why the bank does so, and why. It earns a lot in the difference of interest.
Interest on your savings account is often compounded either daily, and then paid monthly. Easily the best thing about this is that there is a compound interest or interest compound. The bank will be paying you that on the money paid on interest! Here is how the bank calculates compound interest for you.
Daily compounding = principal (1+interest rate/365) = daily compound amount.
Now, we shall see how banks and credit unions manage your savings account, and what happens on opening a new account.
The amount of interest that you have in your savings account depends on the kind or type of financial institution which you have selected for the account. Credit unions and banks are very different. Banks are commercial entities while credit unions are mostly non-profit cooperative organizations which are organized or developed for servicing a very specific group of people. For instance, state employees have access to a state employee credit union. Loans from such unions are not very expensive, but at the same time you will not get a very high interest either. This is not always how it works though. Right now, some credit union interest rates are higher than many banks. Additionally, credit unions pay interest on accounts which banks do not give interest on, such as checking accounts. However, at the end of the day, you still need to be a member to get these benefits, and to get a savings account.
Typically, banks have two types of savings account-
Basic savings account: This is also called a passbook savings account. This generally does not have any minimum balance requirement and you can withdraw any time you want, but gives you a very low rate of interest. So, that is a considerable downside unless the benefit is worth more to you. If you invest here, you won’t earn much in interest. At times, the interest is less than 1%.
Money market accounts: These pay you much more interest, but require you to have more money in the account at all times. Withdrawals are limited as well, along with the number of cheques you can use to withdraw.
There are times when the bank charges you fees just for having a savings account. These may be negligible to a noticeable amount. It all depends on your account balance. Because of this is it important to see what other banks are offering before choosing one. Here are the things to look for:
Service charges and fees
Minimum balance requirements
Interest rate on balance
In other words, compare savings accounts before finalizing on one.
When you open a savings account, you get a register. It is a small book in which you write down your starting balance, and subsequently all your future withdrawals and deposits. It helps you to keep track of all these things.
Each month, you get an account statement from your bank. This is a statement of all your transactions, along with any fees incurred by your account. It also tells you about interest earned. To ensure you do not forget to write down deposits and withdrawals, go to each entry in your register or pass book, and then compare the same with the bank’s statement. They need to match up. If not, you can call the bank anytime you want.
The last thing you want to remember is to make routine deposits in your savings account, and watch your money grow!