It is possible to save your money safely and generate interest with a savings account. Of course, each bank has a different set of regulations and interest rates. A minimum balance is required by some bank institutions while there are also others that don’t need one. Currently, the annual percentage yield, or APY, for savings accounts is about 0.10%. But you can also get high APY (up to 2.25%) from major online banks.

What is Interest?

If you use another person’s money, there’s a price for that and it is called interest. A bank will charge interest to a borrower when they take out a loan known as the annual percentage rate or APR. On the other hand, the bank imposes interest (annual percentage yield, or APY) on customers who keep cash with them.

With a savings account, interest typically builds up daily or monthly and is paid out on the last week or day of the month. For example, you have $5,000 in your savings account that pays daily compound interest of 1%. Your funds would increase by 13.6986c, or 1/365 of one percent, at the conclusion of the first day, giving you $5,000.136986 or $5,000.14.

Warren Buffett is a well-known investor. When asked about his riches, he said that it is all thanks to his “lucky genes”, the fact that he’s living in America, and compound interest, by which he meant the concept of gaining interest on interest. Recalling our earlier example, You received interest on $5,000 on the first day. The following day, you’d also earn another interest from what you have on the first day. Meaning, you’ll receive $13.705 (or 1/365 of 1%). Notice that you made 0.0019 cents more on the second day compared to the first day.

While it doesn’t seem significant at first, compound interest over the course of many months and years starts to make a significant and noticeable effect. In the first year, you would receive $50.25 in interest, in the second year,$50.76, and in the fifth year, $52.30. The interest you make on your savings account increases with the amount you deposit and the interest rate.

Banks Pay Interest

You may think that there’s a hidden drawback or disadvantage when you keep your money in a bank account. But there’s really nothing and the bank only asks that you make as many deposits as you can for as long as you can.

Although banks do earn a limited amount through fees, their main source of income comes from lending money to customers who have made deposits. They have a huge difference in the profit margin between money deposits and loans. Observe that they impose higher interest for loans than those who are depositing money.

Consider a scenario in which the bank lends someone else $200,000 at 5% interest while giving you 1% interest on your savings of $200,000. On $200,000, the bank receives 4% in yearly interest, never mind other charges and expenses.

Is My Money Secured in a Savings Account?

The financial crisis that took place in 2008 could have caused trauma for others and be wary of banks. Hundreds of banks went bankrupt in the years that followed the crisis, and some of them were unable to pay depositors the full amount due. However, there is not a single bank filed for bankruptcy in 2018, and we can confidently say that the banking industry had a full recovery.

The Federal Deposit Insurance Commission’s insurance cap was increased from $100,000 to $250,000 as a result of the financial crisis, and additional regulations were developed to make sure that the government agency has enough money to be able to protect all clients in times of need and crisis. Now, every depositor has a minimum of $250,000 in insurance coverage at any bank where they opened an account. Additional security is provided by joint accounts, which have a $500,000 cap.

Not to scare you, but in reality, there is no place to keep your money that is 100% secured. However, savings accounts have much lower risk and a much smaller minimum deposit than pouring your money into investments like bonds, stocks, and real estate. Moreover, they give higher rewards and are better than hiding money beneath your bed or inside your closet. Note that inflation increases money value, and keeping it outside of a bank account won’t do much difference.

Applying for an Online Savings Account

It is true that technology makes everything more convenient. Now, you can open a savings account in the comfort of your home through internet banking. Simple self-identification forms are all that is required to start an account. After that, you can just send an initial deposit, make regular deposits, and log in to your account anytime and anywhere to see your earnings.

Since online banks have become more and more common lately, increased competition is advantageous for customers. Make time to compare online banks before applying for a savings account. It is advisable to compare online savings accounts based on their minimum account balance, fees, APY, and customer support among others.

The annual percentage rate, or APY, is the most crucial factor to compare, no doubt. The APYs available today range from 0.01% to 2.25%. Higher rates usually come with a minimum maintaining balance in your account, so remember to double-check the requirements before aiming for a high rate.

Some may ask if they can have multiple savings account from multiple banks. You may open a new savings account in another bank if you please but your finance may become more difficult and complex if you manage many accounts.

Wiring money from your savings account is possible but bear in mind that there can be fees that differ for every bank.

Top Online Banks Where You Can Open a Saving Account

1. BBVA

Physical and online banking is available at BBVA. Along with a variety of other banking services including credit cards and loans, it provides various account types such as online checking and savings accounts. Their bank app can be easily accessed and comes with many features. However, BBVA has a relatively costly overdraft fee and you need to be eligible to have a $0 fee account.

2. Chase

Checking accounts are only available online with Chase. Applying for a savings account and certificate of deposit, or CD is done online. Their website and mobile app consist of many features such as bill payments, checking bank statements, activities, and transferring money, among other things. Sending and transferring money is flexible with Chase as it comes in various forms. There are only a few drawbacks with Chase including monthly fees that are imposed on your account and savings accounts having a low-interest rate compared to their competitors.

3. American Express

American Express gives you a significant advantage over other banks as it has one of the highest APYs available. It is one of the top banks in the country, therefore, you’ll benefit from its easy online access, strong security features, and outstanding customer service. You will love American Express more as there are no additional fees to open an account. You may choose the type of account that you have from their long list, but it excludes checking accounts.

Know More About Banking Accounts

Checking versus Savings Account

With a checking account, you can transfer or send and withdraw cash as well as issue checks. Your everyday banking would be done using this account. On the other hand, You can keep money in a savings account for a future date, typically with a certain financial objective in mind. Accessing money is usually less flexible with savings accounts.

High Yield Savings Account (HYSA)

High-yield savings accounts offer a greater interest rate as a reward, enabling your money to increase more quickly over time. Annual percentage yield (APY) is referred to as the interest rate for this type of account. If your account has a high APY, substantially, your money grows more quickly.

Health Savings Account (HSA)

The distinguishing factor between a personal savings account and a health savings account (HSA) is that the money in an HSA can only be utilized for approved medical costs. Even though HSAs have some benefits, like tax-exempt interest, this type of account can be challenging to be eligible for because you must have a high-deductible health plan or HDHP.

Certificate of Deposit (CD) Account

CDs are becoming more and more common and we must say that it is justifiable. A certificate of Deposit (CD) Account is a type of savings account that keeps your money locked up for a certain amount of time while it gains a greater, fixed rate of interest. So if you feel that a regular savings account is not the best option for you, try and learn more about a certificate of deposit (CD) account.