The Various Types of Savings Accounts

Keeping Your Money Safe

Do you put the money you save under your pillow or in a piggy bank?  Of course not!  Unless you are going to give your savings to the tooth fairy.  You want to put your money in a safe and secure savings account.  Keeping your cash savings at home tucked away somewhere in your house is never a good idea.  Many things can happen, like theft, fire, or misplacing it, and once that cash is gone, there is no getting it back.  It would be a “bon voyage” to that hard-earned money you were saving.

A savings account is an account opened at a financial institution designed to make deposits so that you can SAVE your money.  Whether you choose a traditional bank, online bank, or a credit union, your money will be federally insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000.  The FDIC protects your money, so if the bank goes out of business, you are still protected.  Knowing that your money is safe will give you a sense of security.

Before you safely put your money into an account, what other items do you need to research when determining where to open the savings account?

Earning Interest

The next feature of a savings account is that it earns interest on the money you deposit into that account.  What is interest on a savings account?  In the simplest terms, it is money that you earn, and that the bank deposits into your account just for having your money at their institution.  The amount of money that gets deposited is dependent on a couple of factors.

• Your savings account balance
• The Annual Percentage Yield (APY) at your bank
• Higher APY give you more interest income
• Compound interest which helps your money grow.

Compound Interest and Savings Accounts

If your interest will be compounded monthly, the following should give you an idea of how compound interest works:

The interest is calculated and added to your balance, therefore increasing your balance in your account.  The following month the interest is calculated again on the sum of your principal balance and the previously accumulated interest.  With compound interest each month you accrue interest on top of interest, thus defining the concept of compounding interest.

The Beautiful Side of Interest

Interest on your student loans can get ugly, but the beauty of earning interest is that it increases your savings account balance. With compound interest, the next month’s balance will earn MORE interest on the money you have deposited and the previously accumulated interest.  Win, win!

Example is based on:
$250 initial deposit
$3,000 in contributions
1% APY
Savings for one year

REFERENCE Bank Rate Calculator

Checklist: Be Mindful of Account Details

• Is there a minimum balance requirement?
• Are there any monthly service fees?
• If there are fees, is there a way to avoid the fees? Sometimes banks will waive a monthly service fee if you have a direct deposit or often students are offered zero-fee accounts.
• The plan is not to be continually withdrawing money from your savings account. However, when it becomes necessary to make withdrawals, it is good to know how many withdrawals your financial institution will allow per month without charging you a transaction fee.

Do your homework.  Be an informed consumer, ask questions, and be sure to read the fine print.