How Does a Savings Account Work?

The most commonly opened bank account in the world is a savings account. As a parent, your child may ask, how does shutterstock_31443457a savings account work, so it’s important to be prepared to answer properly. You might just help motivate them to save!

So what is a savings account and how old you need to be to have a bank account? Well, a savings account lets you safely store your money, while earning a tiny amount of interest on it each and every month. Most of these accounts have lower minimum balances like $20, or require no balance whatsoever. This is determined by the bank, so it’s always smart to shop around when opening a new savings account.

How do you open a savings account? In order to open a savings account you need to be of legal age or have the help of a legal guardian. For instance, in most of the United States you need to be 18 years old, although some states have special laws requiring you to be older. The reason for this is that a minor can’t legally sign any type of binding contract.

The great thing about saving money with savings accounts is that they are extremely safe because your money is insured. If you keep your money at home, and it burns down or gets robbed you’re out of luck. Not the case when fdic-moneydealing with a bank. Banks are able to insure any money you deposit till you reach $100,000. They insure the money through the FDIC or Federal Deposit Insurance Corporation. This means even if your bank goes bankrupt your money will be safe. Not one person has ever lost money in any credit union or bank that was being insured by our FDIC since its inception in 1933.

How does a savings accounts work and how you are able to earn interest from a savings account?
It’s simple, interest is the money your bank pays you in order to use the money you’ve deposited to help fund loans for their other customers. The bank is essentially selling money! The best part is your money is still there whenever you want to take it out. The difference between the interest they end up paying you and the amount of interest they charge their other customers is a big part of how they earn money as a business. The interest you receive on your savings accounts is normally compounded on a daily basis and paid out monthly. The neat thing when it comes to compounded interest is basically paying interest to you on money that they’ve already paid to you in interest. Knowing the type of interest your account pays is something that should not be overlooked!fdic_splash

Banks offer a few types of accounts besides savings accounts. These include checking accounts and money market accounts. A checking account is a transaction based account. It was created to allow people to write out as many checks as they needed to write out each and every month. These type of accounts are meant to be constantly used unlike savings accounts and don’t offer the same types of interests rates, if any. Money market accounts on the other hand, usually will pay more than savings accounts in interest, but normally will require more money balance to be in your account. These accounts may also limit how often you can make withdrawals each month.

If you’re saying to yourself “I need a savings account” just remember, when shopping for a savings account you want to look at both online internet savings accounts and offline regular savings accounts for the best deals, types and amount of interest being paid, and the lowest fees. Every bank charges differently. Some banks may charge fees but have lower minimums while others may require more money to be in your account but don’t require a monthly fee. Take your time and compare all of your available options. It’ll save you a good chunk of money and isn’t that really what a savings money account is all about.