If you’re building an emergency fund, saving for a big purchase, or getting money together to invest, using an insured savings account can put you on the right road.
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.
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 don’t put money in a regular account for the earnings.
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.
While you’ll certainly earn more in a regular savings account than if your money was in a checking account, or no account at all, a regular savings account may not earn you tons of extra funds. You should explore the options available as some banks offer a premium-level savings account for eligible customers. Lake Area Bank offers our PERKS Premium Savings account with higher-tiered interest as a premium savings option.
Money Market Accounts
Most banks offer hybrid accounts—part checking, part saving—called money market accounts (MMAs) or sometimes money market deposit accounts. They’re similar to money market mutual funds, but have the advantage of FDIC insurance.
Money market accounts typically pay higher interest rates than regular savings accounts, and may offer blended or tiered rates, which means you can earn an even higher rate on large balances or on part of your balance over a certain level.
And you can usually make a limited number of cash transfers or write a limited number of checks—generally a total of three—against your account each month.
With MMA accounts, the minimum required deposit is often higher than with a regular savings account. If your account falls below that mark, you may face service fees, forfeit your interest, or both.
Certificates of deposit (CDs) are high-end savings accounts and they generally pay interest at a higher rate than other bank accounts. What makes CDs different from regular savings accounts is that they’re time deposits. That means that when you open a CD you agree to commit your money for a specific term, or period of time. You also agree that if you withdraw money from the CD before it matures when the term ends, you’ll forfeit some or all of the interest you would have earned.
Typical terms include six months, a year, two and a half years, and five years; however, the term may vary from bank to bank. The longer the term, the slightly higher the interest you’ll typically earn. There may be a minimum deposit—often $500—and some banks may pay slightly higher rates for large deposits.
When a CD matures, you can roll over the money into another CD, transfer your money to a different account, or have the bank send you a check. But you must tell the financial institution what you want to do by the deadline on the CD. If you do nothing, your money is usually reinvested into another CD with the same or similar terms, but at the current rate.
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.
Want to learn more? Contact one of our banking experts at Lake Area Bank today!