Savings Accounts

Getting Interested

With a savings account, you earn interest, or a percentage of your balance, on the money in your account. This means that your money is constantly growing. What you earn depends on the interest rate the bank pays—which varies by account type and is set by the bank based upon what other banks pay for similar accounts.

Regular Rules

The most basic accounts, where you can deposit and withdraw money at any time, are called regular savings accounts, or sometimes statement savings accounts. What that means is that any activity in the account—deposits, withdrawals, fees, or interest earnings—and your current balance are reported in a printed or online account statement, usually once a month.

You earn interest on a regular savings account only if you keep at least the minimum required amount in the account. If your balance is lower, some banks don’t pay interest and others may charge a fee for holding your money. The only way to avoid such penalties is to get an account without a required minimum or fall into a category that would allow it to be waived, such as being a full-time student or older than 65.

Isn’t It Interesting?

When banks advertise the interest rates on their savings accounts, they tell you the nominal rate and the annual percentage yield (APY). The nominal, or named rate, is the rate they pay. The APY is what you earn over the course of a year, expressed as a percentage of your principal.

The amount of money you actually earn depends on whether the account pays simple or compound interest. Simple interest is calculated annually on the amount you deposit. With compound interest, which can be paid daily, monthly, or quarterly, the interest is added to your principal to form a new base on which you earn the next round of interest.

How can you tell whether interest is simple or compound? If the nominal rate and the APY are the same, you’re earning simple interest. If the APY is higher, the interest is compound.

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