Saving account – Types, how to open, advantages and disadvantages

A saving account is a deposit account for the accumulation of money in a safe place for future use. It is one of the best ways to invest your money in a bank for the long term.

A saving account is usually opened by a salaried person or a person with a fixed income. The main purpose of having a saving account is to put money in a safe place to earn interest.

What is the purpose of savings?

Savings help to meet your financial goals. It means you are ensuring you have enough funds for your future needs and investing your money for your good or bad time. Saving helps you to be prepared for emergencies and other unplanned spending scenarios.

How does a saving account work?

First, you have to open an account, and deposit money. Banks pay you a certain amount of interest on the money you deposit in your account; you can also withdraw money from your account. The bank loans that money to other people and only they can charge a higher interest rate on the loan than what they pay you for your account. (1)

Types of saving account

While there are several types of saving accounts, some are given below with a detailed description.

1. Regular saving account

A regular saving account has a major advantage. This type of account encourages you to put money into your saving account on monthly basis. The interest rate is also paid on monthly basis in such accounts. A regular saving account is very liquid because you can take your money out at any time without any loss.

2. Money market account

A money market account is a type of savings account that pays more interest rate than a regular saving account. A money market account also provides you access to funds via debit card and cheques facilities.

3. Certificate of deposit (CDs)

It is a type of saving account in which the bank holds the amount of money deposited in your account for a time such as 6 months, 1 year, or 5 years. This type of saving account is usually opened in commercial banks. Certificate of deposit accounts pays a much higher interest rate than any other saving account. This account comes with a time limit to withdraw but if you withdraw early you will have to pay a penalty.

4. Traditional saving account

It is a type of saving account in which there is no limit on deposits and withdrawals, but usually pays a lower interest rate than any other saving account. It is safe as it is insured by the federal government.

5. High yield savings account

It is also a type of saving account. The interest on high yield savings accounts can be 20 to 25 times higher than other regular savings account. A high yield account is a safe place to deposit a large amount of money for unexpected emergencies, future goals, or unexpected expenses.

A high yield saving account works the same as a standard saving account. You can open an account by visiting a bank or open it online. The bank requires a minimum deposit in your account to open.

Maintain the minimum balance in the account to earn interest on it. High yield savings accounts allow you to increase your money so your funds grow faster. The idea is based on the concept of compounding interest.

That means your interest is calculated on the principal amount balance, plus any accumulated interest. You can deposit an unlimited amount in your savings account. Here are some of the benefits of this account.

A high yield saving account offers a higher interest rate than any other saving account, which means your money grows faster.
You can also withdraw money without any penalty, which means you have easy access to your money.
Deposit an unlimited amount of money in an account.
With the help of a high yield saving account, it is easy to set up transfers from your checking account to keep your saving grow faster. (2)

6. Free saving account:

Free saving accounts do not charge any hidden fees. Free savings accounts almost have the same features as other saving accounts with almost the same rates. It is a smart option to open an account with no fee, so you can access your money easily without any loss. On the other hand, regular saving accounts charge a monthly fee to access your money.

7. Online banking:

Banks that provide online banking are an excellent source for a fee-saving account. They offer to open a savings and checking account. Even though they are fully digital in working but they have the same banking rules and regulations as other standard savings accounts.

Since all of you are already familiar with the online saving account, you will always have the freedom to manage your account when and whenever you like. The websites and smartphones apps make your account much easier to run without any hassle. (2,3)

Saving account interest rate and how interest rate works?

A savings account is a good place to store your money. The interest rate is much higher than a checking account in a savings account. This means you can earn more money in the form of interest.

Generally, the interest rate is a part of your money that banks promise to give you every year for choosing them. Therefore interest rate varies based on the bank, different banks offer different rates on interest. (3)

For example, a bank can give you up to a 3% on an amount every year you fixed in your bank. The three main factors that determine the interests are given below:

The amount of money deposited in the account ( savings )
The interest rate.
The time limit of a saving account.

In simple words, interest is paid after borrowing money. So you will also pay interest if you are borrowing money from a bank or you can collect interest when you lend money.

When you deposit money in your saving account its means technically, the bank is borrowing money and in return, they are paying interest.

The higher the interest rate, the more money you get, so it is up to you to choose a bank with a higher interest rate. (4)

References:

https://www.google.com/search?q=what+is+savings+account&source=lmn