How Savings Accounts Work: Simple Ways to Earn Interest

Savings accounts have evolved over time from Traditional accounts in people saved money in small containers and wooden boxes to now modern or digital savings accounts that are provided by banks, credit unions and SACCOs. Modern savings accounts are the best because they have benefits such as account security, interest on savings and sometimes loans against savings. In this guide, we will learn about how savings accounts work, their benefits and how you can get one.

Understanding Savings Accounts: What They Are and How They Work

Savings accounts are the types of accounts that people open with banks, credit unions and SACCOs for the sole purpose of safe keeping money. Other than safe keeping of money, there are benefits associated with these accounts such as interest and loans on savings although not all banks provide loans on savings. Money saved in these accounts can accumulate over time especially when saved consistently. Currently, it is challenging to save money when you don’t have a savings account.

Types of savings accounts you can choose from

There are several types of savings accounts that you can choose from such as traditional or low interest savings accounts. These accounts attract low interest and sometimes no interest at all. We also have high interest accounts that pay high returns on savings. They are mostly provided by the online banks. Fixed savings accounts such as certificates of deposits (CDs) pay regular fixed interest but the account is normally locked for an agreed period of time. Accessing your savings in this account before maturity period attracts a penalty. There are other savings accounts such as money market accounts and specialized accounts.

How savings accounts actually work every day

The first step is opening savings account with the bank of your choice, and the process is very simple, you only need your national identity card. After opening the account, you now start depositing the money as the bank keeps them safe for you. Banks trade or invest your savings and they pay you interest. Just a reminder that always open your account with banks that pay high interest on savings if you mind about growing your savings faster. Also, save consistently, the more you save, the more your money grows.

The Benefits of Using a Savings Account for Your Financial Goals

Reach your financial goals faster

Most of financial goals are very expensive and they demand a lot of money to be achieved. Savings accounts accumulate money little by little that could be channeled towards these goals. The common financial goals include buying a car, buying a home, paying for education, weddings and vacations. Regardless of your income level, saving consistently in high interest savings accounts can accumulate money for such goals, saving you from the temptation to sell your property or take on loans.

Keep your money safe and protected

Saving your money with banks is safer than when you keep hard money in your homes. Apart from interest, banks guarantee the security of your savings through insurance. With insurance, you can claim and recover your money even if the bank goes out of business.

Build strong financial habits

Savings accounts enhances discipline and consistency in saving money, which motivates people to save more money. High interest savings accounts motivate people to save regularly as they see how their accounts grow faster. The accounts have tracking tools and even some provide monthly statements to account holders so that they understand how their savings are growing each and every month.

Perfect for emergency savings

When emergencies occur, most people are left stranded because they don’t know how they are going to bail themselves out. Some sell property while others borrow money to sort out emergencies like medical bills, car repairs or job loss. A savings account is ideal for keeping an emergency fund. In the event of an emergency, you can easily withdraw cash from the emergency fund and sort out the issue, without necessarily borrowing loans or selling your property.

How Interest is Calculated on Your Savings Account Balances

How compound interest grows your money

Savings accounts grow money by the power of compound interest. Unlike the simple interest that is yearly focused, compound interest is computed to show how the account is growing daily. With compound interest, you earn interest on your deposits and on the interest you already earned. For example, if you earn $10 in interest this month, next month you’ll earn interest on your balance plus that $10. The magic is that your interest also earns interest just like your deposits that make your savings to grow faster over time.

Understanding simple interest vs. compound interest

Simple interest is when you earn interest only on the money you originally deposited. This type of interest grows more slowly. Compound interest on the other hand is when you earn interest on every deposit you make plus any interest that you have already earned. For example, when you deposit $1,000 and earn $100 in interest, will you earn interest on your deposit of $1,000 and also on interest of $100 at the same rate. Accounts that compute compound interest daily or monthly grow faster than those that do it annually.

What APY means and why it matters

Annual Percentage Yield or the APY is the total interest earned yearly including the compound interest earned on the deposits. APY shows how your money will grow over a year and a higher APY means that you will earn more money on your savings and vice versa. The element of APY is very sensitive and should not be ignored when you are choosing a savings account.

Selecting the Right Savings Account: What to Look For

Compare interest rates and account features

Interest rates determine the rate of return on your savings, and not all banks offer the same interest rates on savings, some banks’ interest rates are high while others low. Making comparisons will help select the bank with the highest interest. Other than interest rates, there are other features such as monthly fees, minimum balances and savings withdrawal restrictions that some savings accounts have. Although not all banks have these features, is good to confirm if your bank of choice have them before opening a savings account with them.

Bank vs. credit union: What’s the difference?

Banks are profit making entities that serve the public by provision of banking services such as deposits, withdrawals, loans and savings. Credit unions on the other are not for profit organizations formed by groups of people such as workers, women and youth groups, men groups, regional groups just to mention but a few. Banks are publicly owned while credit unions are owned by members. Credit unions provide higher interest on savings, lower fees and affordable loans compared to banks.

Online savings accounts can offer better returns

Online banks offer high interest savings accounts compared to traditional banks because they have fewer overhead costs. While traditional banks operate branches in towns and cities that are expensive in terms of rent and rates, online banks operate virtually enabling them to save these costs and use the money to provide high interest on savings accounts. Online banks also have low or zero monthly fees, making them the favorites over traditional banks.

Watch out for fees and balance limits

Before opening a savings account, make sure you understand the terms. Some accounts might require you to keep a certain amount of money in the account, charge monthly fees or even limit how often you can withdraw money from your savings account. An account with monthly charges can limit the growth of your savings while the one with withdrawal limits could inconvenience you in times of emergencies.

Tips for Maximizing Your Earnings with a Savings Account

Save money regularly, even in small amounts

The success in saving money comes with consistent savings. You don’t need to deposit large amount money to grow your savings, you need to save small or sustainable amounts of money each week or month consistently. The results are normally seen after saving money over time like 1 or 2 years, so you need patience, discipline and consistency when it comes to saving money.

Set up automatic transfers to make saving easier

One of the best ways to save money is to automate the saving process. Automation allows the bank to deduct money from your salary and directly channel it to your savings accounts. The bank will be doing the process each and every month as you concentrate on other things. Automation also enhances consistent savings because the bank will not forget to deduct money, ensuring that you save before making any expense.

Look for high-yield savings accounts

If you want your money to earn more interest, look for a high-yield savings account. These accounts offer higher APYs compared to regular savings accounts, which means your savings grow faster. They are often available through online banks. Most online banks have simplified the process of opening accounts so users can easily create one and start saving money.

Keep your savings for real needs

Before you start saving money, ensure you have a definite financial goal for which you are saving money for. Only withdraw your money when it is time to implement your goal or when an emergency arises if you were saving for emergencies. Leaving money in the savings accounts for long earns interest and that is the real growth of your money.

Conclusion: Start Growing Your Money Today with a Smart Savings Account Strategy

Opening a savings account is a great step toward building a better financial future. It’s safe, easy to manage and helps your money grow with time. You can save money for various reasons such as saving for emergencies and future financial goals. To successfully save money, you need the choose the right account, one that offers high interest and low or zero monthly fees so that your savings will grow at a fast rate. Finally, save regularly without skipping a single month and realize the impressive growth of savings over time. Consistency is the key in saving money.