Options for saving

Grow your money

Banks help you manage the flow of money you earn and spend. But equally important, banks help you meet your financial goals by providing a variety of savings accounts that not only keep your money safe but help it grow.

Overview

How savings accounts work

When you deposit money in a bank savings account, the bank credits the amount to you and pays interest on your balance. Interest is calculated as a percentage of your account balance, and the bank pays it at a specific rate on a regular schedule.

Banks pay interest on savings accounts—and sometimes on checking accounts—to encourage you to save with them. They can lend the money in their customers' accounts to earn interest from borrowers, so the more banks have on deposit, the better it is for their business. But it's still your money, and you can withdraw it when you wish.

You'll find that different types of savings accounts offer different interest rates, typically linked to the level of access you have to your money. In addition, each account has different rules, such as minimum balance requirements, fees and penalties that may apply in certain circumstances. Some types of accounts limit the number of free monthly withdrawals. With a certificate of deposit (CD), which is known as a time deposit, you may forfeit some or all of the interest you would have earned if you take an early withdrawal. Be sure to choose the savings account that suits your needs best—or select a combination of accounts to help you meet different needs.

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Different Ways to Save

Here's an overview of the types of savings accounts most banks offer. Some banks also have special accounts that don't have minimum balance requirements, such as savings accounts for children.

Regular savings accounts

  • Allow you to deposit or withdraw your money whenever you want
  • Pay a steady—often small—rate of interest, though you may have to maintain a minimum balance to qualify to earn this interest

Certificates of deposit (CDs)

  • Generally pay a higher interest rate than regular savings accounts
  • Available in a variety of terms, often in increments from six months to five years, and custom terms may be available to align with a particular saving goal
  • Require a commitment to leave the money for a specific term, and if you withdraw money before the end of the term, you may forfeit some or all of the interest

Money market accounts (MMAs)

  • Usually pay a higher interest rate than regular savings accounts but less than CDs
  • Allow you to write a limited number of checks or make a limited number of transfers each month
  • May not pay interest, may impose fees, or both, if account balance drops below required minimum
  • May tier interest earnings, so that you earn different rates of interest on different parts of your account balance
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Compounding

There are two ways in which your account can earn interest: simple interest or compound interest. Simple interest is added once a year to your account's balance. If you earn 2.5% interest and you have $10,000 in the account, you'll earn $250 in interest the first year, bringing your total to $10,250 and another $250 in interest in the second year, bringing your total to $10,500.

Compound interest, on the other hand, means that interest is paid on your total balance, including any interest you've earned in the past. So, in the first year you'd earn $250, bringing your balance to $10,250. In the second year, though, the 2.5% interest would be calculated on $10,250, meaning you'd earn $256.25, bringing your total balance to $10,506.25 if it was compounded annually.

The frequency of compounding varies from bank to bank. Some offer daily compounding while others offer monthly, semi-annual or annual compounding. The more frequently your interest is compounded, the more quickly your earnings will grow. For example, if the $10,000 deposit earns 2.5% compounded monthly, the total interest earned at the end of two years would be $512.16.

This two-year gain might not seem like much money, but the difference increases dramatically over time. For example, after 20 years, this same $10,000 deposit could grow to approximately $16,500, depending on how frequently the interest compounded.

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