Savings accounts are a type of deposit account that typically earn interest on the money deposited. The interest rate on savings accounts is usually lower than the rate on other types of deposits, such as checking accounts or money market accounts. However, savings accounts offer a safe place to store your money and easy access to your funds when you need them.
Savings account rates are typically quoted as an annual percentage yield (APY). This is the amount of interest that you would earn if you left your money in the account for one year. However, the APY is not the same as the interest rate. The APY includes the effect of compounding, which is when interest is earned on both the principal (the original amount deposited) and on any interest that has been earned in previous periods. For example, if you have $100 in a savings account that pays 1% interest per year, you will earn $1 in interest at the end of the year. If you leave that interest in the account and do not withdraw it, you will earn 1% interest on both the original 0 and the in interest that was earned in the first year. As a result, your balance at the end of the second year will be $101.01.
Compounding can have a significant effect on your earnings over time. The more frequently interest is compounded, the higher your effective rate will be. For example, if your savings account pays monthly instead of yearly, you will earn 12 times as much interest over the course of a year. As a result, it’s important to compare APYs when shopping for a savings account to make sure you are getting the best deal possible.