What are savings accounts?
A bank or building society in general will offer two types of accounts to customers: checking (or current) accounts and savings accounts. A checking account is generally used to deposit pay checks, create standing orders and pay bills. In contrast, as the name suggests, a savings account is an account where you can save money. These accounts generally pay interest on your balance, but do not allow you to pay bills or write cheques. It is a tool for saving money.
Why open a savings account?
Many institutions nowadays will not pay any interest on balances in your checking account, which means if you want to earn interest on a large cash balance you will need to open a savings account.
If you are employed and are earning money, it is always wise to set a percentage of your wages aside each month and save. This can easily be done with a savings account. Many bank savings accounts can now be linked directly to checking accounts, meaning you can easily transfer money from one to the other. It may also be easier to have a standing transfer set-up, whereby a fixed amount is always put away each month. This way, you can quickly watch your savings grow!
For some, it may be a good idea to do a bit of financial planning. Look at your monthly income and expenses and see how much money you have left over. Saving a high percentage of this so-called ‘disposable income’ is a good way to plan for the future. A savings account will also help you see how much you have saved. Maybe save for a special purchase, such as buying a home, going on a vacation or buying a car.
Are there different types of savings accounts?
Generally yes, but these will depend greatly on the bank or financial institution. Some banks may offer savings accounts with interest thresholds. For example, for certain amounts, you earn a certain level of interest. If you exceed those amounts, you can earn higher rates of interest. This should motivate you to save more. Some banks will also have restrictions of minimum levels on savings accounts before they start earning interest, so make sure you are always above this threshold.
In many cases, other non-bank institutions may offer more competitive rates on savings. For example, building societies or postal savings accounts may offer specific savings products, which may not be quite as flexible as bank savings accounts, but can earn higher rates of interest. These accounts may have restrictions, for example, on how much you can withdraw at one time, a minimum account level, and how often you can withdraw money. Some will levy penalties, so make sure you understand and know the restrictions on the account.
Another specific type of savings account is Certificates of Deposit (CoD) or ISAs. These are special savings accounts that either have balance and/or time limits. These types of accounts, because of their restrictions, generally carry much higher interest rates than traditional savings accounts.