How exactly do savings accounts work? One thing’s for sure - it’s not magic. It’s all about savings account interest rates.
Probably the first bank account you’ll ever have is a savings account. In fact, a savings account is the most common type of bank account, and for a very good reason. Savings accounts allow you to keep your money in a secure place, and at the same time, earning a small amount of interest each month - the savings account interest rates.
Keeping your money secure in banks keeps it safe not only from thieves or your own willful spending habits. If you think that you’ll lost all your money if the bank or credit union goes out of business, then think again. This rarely happens and even if it does happen, your money is still secured by the FDIC or the Federal Deposit Insurance Corporation. The FDIC is an independent federal government agency that backs-up banks or credit unions insuring your money to up to about a hundred thousand dollars. With this in mind, you can now open a bank savings account with only a very low minimum balance (at times even without).
Not a big spender and your house has the best security system so you don’t need a bank? Think again, and again. If you keep your money to yourself, then your cash will only rot without any chance of gaining any savings interest rates as it would if stored in a bank.
This’ how it works: The moment you put your money in a bank savings account, it earns interest. The money will just sit there and earn more money. Wow! And it’s no magic, or scam. The interest that you’ll earn is actually the money that your bank pays you so they can use your money to fund loans for other people. Banks make money by selling your money; the people who loan (your money) are charged a slightly higher interest rate than the savings interest rates paid for the use of your money. That’s just the way it is so banks would stay in business. Any how you would still benefit from your savings interest rates, right?
Savings interest rates are usually compounded daily and paid monthly. Meaning, your bank is paying you an interest inclusive of the interest they pay you for the use of your money. If your saving account’s interest rate is 1%, then each day the 1/365th of that 1% of your money is added to your total to earn a slightly bigger interest the next month. And, the only costs involved for this are the interest rate paid on your balance, the minimum balance requirement, and the fees and service charges on the account (if any, for example if you fail to keep a certain amount of money in your account, withdraw, etc.). The only important thing then is for you to maintain your deposits. Then, you can easily watch your money earn more, more, and more.
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Savings Account Interest Calculator
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