In the realm of personal finance, one of the most popular types of account that people open is a basic savings account. A basic savings plan is one of the safest ways to earn interest. However, many people are confused about the differences between savings accounts, Money Market accounts, or certificates of deposit. Additionally, people are often confused about how much they can earn on their basic savings plan, and how the interest is calculated.
A basic savings account is one in which you deposit money with a bank, either as a lump sum or in regular installments. The bank will pay you interest on the balance in your account. You need to read the bank’s terms and conditions to find out when interest is added to your account. Most banks will do so annually. Normally, the bank will calculate how much interest your account earned on a daily basis.
The interest rate you get is usually referred to as the APY (annual percentage yield). For basic savings accounts, it tends to be very low. Right now, a typical APY is just .05%. That means if you put $100 into a savings account today and left the amount untouched, that account would be worth $100.05 in one year’s time. As you can see, you are not going to get rich putting your money into a basic savings account.
Why use a basic savings account?
A basic savings account is virtually risk free. Your bank gives you access to your money via automated teller machines, although there may be a limit on how much you can withdraw each day. Security and convenience are the main reasons why people choose to open basic savings accounts.
Differences between a basic savings account and other types of account
A Money Market account is very similar to a basic savings account. Banks provide access to your funds via ATM. Some Money Market accounts also provide the owners with checks. You can add more money to your account at any time. You may be restricted in how often you can withdraw money. Furthermore, you will have to deposit a large sum of money to open one of these accounts, and you will need to keep the balance in excess of the minimum balance stipulated. In return, the bank pays you higher interest than on a basic savings account.
A Certificate of Deposit (CD) account is one in which you deposit an amount of money for a stipulated time period. At the end of the period, your money is returned with interest.