Savings accounts are the best place to stash your money and make your savings grow at the same time. But, how exactly does interest work in this type of account?
Savings accounts are known for two particular features: They are the best place to store your money and, at the same time, make more money. How? They usually offer higher interest rates than checking accounts.
Before running to your bank branch to open a savings account, you should first understand how do they work. Check this guide and learn how interest works.
The interest in a savings account
As you may know, interest is the cost of borrowing money. In the case of savings account, the one borrowing your money is the bank and it pays you interest in return.
The bank will determine the interest rate, which sets the amount of money it will pay you. The annual percentage yield (APY) will help you determine how much money you will earn in interest every year.
The APY bases its numbers on the interest rate and the interest compounds (daily, monthly or annually).
When researching the best banks to open a savings account, one of the main things you should compare is the APY they offer, besides the fees and conditions. Bear in mind that online banks usually offer higher interest rates and no minimum account balance requirements or fees.
Now that you know how interest works in a savings account and what you should consider while doing your bank research, you can define your savings goals!