Saving money and earning interest hits two birds with one stone. People open up a high interest savings account with Great Southern Bank for this exact reason. Opening an account through a desired bank is one of the safest and most reliable ways to save money. Banks sell earning interest as a bonus to entice clients to open a savings account.
It leaves the question for beginners how exactly does interest work on their savings? Here’s what you need to know about interest on your savings account
Different Types Of Savings Accounts
When considering how a savings account generates interest, it’s important to understand the various types of savings accounts available. There are regular savings accounts, high-interest savings accounts, and money market accounts. Each type has its own features and benefits, which can impact the way interest is earned and accrued.
Regular Savings Accounts
Regular savings accounts are basic accounts offered by banks and financial institutions to help you save money securely. These accounts often have lower interest rates compared to other types but are easily accessible and suitable for short-term savings goals. They usually have minimal balance requirements and provide a straightforward way to start saving money.
High-Interest Savings Accounts
High-interest savings accounts, also known as high-yield savings accounts, offer better interest rates than regular savings accounts. These accounts are designed to help you earn more on your savings balance over time. While they may come with slightly higher balance requirements, the increased interest earnings can make them a preferred choice for those looking to grow their savings more efficiently.
Money Market Accounts
This account is a mix between savings and checking. They typically offer higher interest rates than regular savings accounts and often come with check-writing privileges and debit card access. Money market accounts may have higher minimum balance requirements and may offer tiered interest rates based on your account balance.
Certificate of Deposit (CD) Accounts
While not exactly a savings account, certificates of deposit (CDs) are worth mentioning. A CD is a time-bound deposit where you agree to leave your money untouched for a specific period, usually ranging from a few months to several years. In return, you’re offered a higher interest rate compared to regular savings accounts. CDs are suitable for those who can set aside money for a predetermined period.
Individual Retirement Accounts (IRAs)
IRAs are specialized savings accounts designed to help you save for retirement. They come in two main types: Traditional IRAs and Roth IRAs. Traditional IRAs offer potential tax deductions on contributions but are taxed upon withdrawal. Roth IRAs, on the other hand, offer tax-free withdrawals in retirement but contributions are made with after-tax income. IRAs often provide a range of investment options, which can include stocks, bonds, and mutual funds.
Online Savings Accounts
Online savings accounts are offered by digital banks and financial institutions operating primarily online. These accounts often have competitive interest rates due to lower overhead costs compared to traditional banks. Online savings accounts provide convenience through mobile apps and online platforms, making it easy to manage your savings from anywhere.
Children’s Savings Accounts
Children’s savings accounts are specifically designed for young savers. These accounts encourage early savings habits and may come with educational tools to teach children about money management. Interest rates on these accounts are typically modest, but they serve as a valuable way to introduce kids to the concept of saving.
Goal-Based Savings Accounts
Some banks offer goal-based savings accounts, which allow you to create separate sub-accounts for different financial goals. This feature enables you to allocate savings specifically for each goal, making it easier to track progress and stay motivated. Interest rates on these accounts vary but can provide a structured way to save for specific objectives.
How Does Your Savings Account Generate Interest?
What is interest to begin with? Interest is the money you earn on your savings account balance over time. Interest is typically computed annually depending on a bank’s annual percentage rate or APR. If your savings account has an interest rate of 1%, you’ll earn $1 for every $100 in your account after one year.
Now that you have a broad idea, how is it calculated on a savings account? Financial institutions use two main methods to compute: simple interest and compound interest.
Simple Interest Is Based On Your Initial Deposit
Simple interest is calculated based on the day you open your savings account. For example, you deposited $1,000 as principal into your savings account. Assuming it has a simple percent interest rate of 1%, you’ll earn $10 in interest after one year. This type of computation doesn’t consider any interest earned in previous periods.
Financial institutions that apply simple interest rates will base it on an initial amount you deposit, which means you’ll need to make one big bulk deposit to generate higher interest in your savings account.
Compound Interest Is Accrued Through Time
Compound interest is calculated based on your initial deposit and any interest earned each time you deposit again. It means the more money you put into the account, the more interest you earn.
However, if you leave that $1,000 in the account for another year, you’ll earn interest on both the initial deposit and the $10 you earned in the first year. This compounding effect encourages you to deposit more often for your savings account balance to grow quickly.
What You Need To Know About Interest In Savings Accounts
Interest rates vary per financial institution. Some banks offer higher interest rates on your savings account.
It’s best to shop around and compare each deal before opening a savings account with a desired bank. Some savings accounts may also have minimum balance requirements or other fees. These factors could affect how much interest you earn.
Interest on a savings account is typically credited to your account monthly or quarterly. It means that the interest you earn is regularly added to your account balance, which can help your savings grow more quickly.
Why You Need Interest In Your Savings Account
Why is interest important when it comes to savings accounts? The answer is simple and it helps your money grow over time. Even the lowest interest rate has already given you more money per annum than just keeping it stashed. It also helps offset the impact of inflation on your savings.
Inflation can dictate whether the value of your money appreciates or depreciates. Interests help buffer that once the price of goods and services increases. Interest helps maintain your money’s purchasing power and, at the same time, entices you to open up a savings account.
How To Get The Best Interest For Your Savings Account
Interest is important when opening a high-interest savings account with Great Southern Bank. Understanding how interest is calculated and how it can impact your savings.
Getting the best deal can help you decide where to keep your money. By comparing interest rates and choosing a savings account that meets your needs, you’re hitting two birds with one stone by earning while you save.