How a savings account can earn you money

Quick insights

• Most savings accounts offer interest on their balance, with high-interest savings accounts providing more significant earnings to account holders.
• The differences between interest-bearing savings accounts often extend beyond their yield, including variables like customer service and accessibility.
• For a blended approach, you may decide to open more than one savings account for different purposes and benefit from a variety of features.

First and foremost, a savings account is meant to provide a secure place to put money that is not needed for immediate expenses. However, savings accounts can be a good alternative to storing cash at home, offering the potential to earn interest over time. In this article, we’ll discuss the different kinds of interest-bearing savings accounts and how they can contribute to one’s financial goals.

What is an interest-bearing savings account?

An interest-bearing savings account accrues interest on your balance at regular intervals. Depending on the account, interest may be compounded daily, monthly or quarterly, with monthly compounding being a frequent practice. When discussing interest, the acronym “APY” (Annual Percentage Yield) is often used, which indicates the interest provided over the course of an entire year, regardless of the compounding frequency.

Often, savings accounts offer at least some interest, which can add up even if the rate is relatively low. Keep in mind, these earnings are considered taxable income that must be reported to the IRS.

High-interest vs. low interest savings accounts

The variation in interest rates among savings accounts often raises questions about potential trade-offs. While high-interest accounts pay more, they may provide fewer features and support that traditional banks’ savings accounts offer.

High-interest savings accounts

Companies with high-interest savings accounts may offer online-only services, with less personal interaction, lack of ATM access and a smaller group of products. In some cases, the high interest rate provided is part of a limited promotion, or there are other account stipulations, such as a minimum balance requirement.

Low-interest savings accounts

Low-interest savings accounts tend to be offered by traditional banking institutions. Such institutions likely offer brick-and-mortar branches, a wide ATM network, extensive client support functionality and a fuller suite of financial products. In many cases, transfers between accounts at the same institution are much quicker than those between separate businesses. Plus, these institutions might prioritize in-person experiences and personal assistance with complex processes, such as buying a house or starting a business.

Which savings account will earn you the least money?

A low-interest account will generally yield the smallest return. However, forming a relationship with your bank through a traditional savings account can have other financial advantages. In many cases, traditional banks will offer special rates on other products to existing clients, such as better rates on mortgages or bundled services.

How to choose a savings account

Choosing a savings account is a personal decision, and it’s important to keep your own goals and preferences in mind when making a choice. Some of the major factors to consider when choosing a savings account include:

• APY: If your main (or sole) priority is to earn interest on your money, a high-interest account will provide the best returns. Using a savings calculator can help you calculate the APY return of various accounts more concretely as you compare them.
• ATM access: High-interest accounts may not have a network of ATMs available, while lower- interest accounts at traditional banks tend to have many.
• Client services: While client services are common with both accounts, you may want to verify what forms of assistance are available and read customer reviews.
• Balance requirements: Either type of account may have minimum balance or initial deposit requirements, which could affect suitability depending on how you plan to use the account.
• FDIC insurance: Regardless of the interest rate, it’s important to choose an account that is federally insured in the event of institutional failure.
• Reputation: Research the account servicer’s background in terms of overall customer experience, ethics and longevity.

Opening multiple savings accounts

You may find that it makes sense to have more than one savings account. It’s very common for individuals to have multiple accounts, including both a high-interest account and low-interest account, to arrange their money for different purposes. For example, you may want to put long-term savings in a high-interest account (where it can sit undisturbed), and shorter-term savings in a low-interest account with ATM access (so that it can be withdrawn from at an ATM, as needed).

In conclusion

The right savings account for you will depend on your personal goals and preferences. The difference between high-interest and low-interest savings accounts can be nuanced, and there are many factors to consider beyond the rate you see advertised. Understanding key savings account features and aligning them with your goals can help you to make informed financial decisions.