Savings Accounts Made Simple

Maybe you want a new car, a computer, or money for the holidays. Maybe you want to have money for college, like me. Whatever your needs are, we all have one thing in common: we need money!

One of the latest trends in banking is a high interest savings account. Many financial institutions now provide savings accounts that yield five percent interest or more annually. Some of these accounts require large minimum deposits to open and even larger minimum balances to avoid monthly service fees. Others require little or no minimum deposit and refrain from charging fees to balances, no matter how big or small. Now is as good a time as any to open your own savings account for whatever your needs may be. Before you sign the dotted line or hit the submit button on that online application, you might want to familiarize yourself with the basics of savings accounts.

Savings vs. Money Market Accounts (MMAs)

Savings accounts are pretty simple: you open one, put your money in it, and earn interest on your balance. Money Market accounts (MMAs) work the same way, but they often yield higher interest rates than savings accounts. Because MMAs yield more interest, they usually require larger minimum deposits and balances (at least $1000). Recently, however, many MMA providers have minimized deposit and balance requirements to the savings accounts level, while maintaining high interest rates. Likewise, many savings accounts providers have begun to offer higher rates without increasing minimum requirements. So what does this mean to prospective savers? A plethora of savings options from which to choose await.

Interest Rates

Many savings accounts offer introduction interest rates that are somewhat higher than their average rates. Once the introduction period (usually a few months) is over, your interest rate may increase or decrease depending on your balance. Obviously, the more money you have, the more money you can make. Most savings account providers offer interest rates that can be compounded daily, monthly, quarterly, yearly, or all of the above. Basically, compounded interest is interest earned from the initial deposit you made to the account, plus any previous interest accrued. The more frequently your interest is compounded, the more your savings will grow. Most rates are compounded either daily or monthly, and again at the end of the year. For example, if you deposited $500 with a 5% monthly compounded interest rate, you would have $525 by the month's end. The interest continues to grow as it is compounded regularly and at the end of the year. A lot of savings account providers have a high annual percentage yield (APY), which means your money can grow even larger. APY can easily be calculated using the following formula: P(1 + r)n, where P equals your initial deposit or current balance, r equals interest rate, and n equals total number of years deposited. Additional compound interest formulas are available online at about.com.

Minimum Deposits and Balances

Usually, the higher the interest rate, the higher the minimum deposit and balance. The deposit is the money you need to open a savings account or MMA. Minimum deposits can range anywhere from $1 to $25,000. Some savings providers also require accountholders to maintain a minimum balance to avoid monthly service charges. Minimum balances, like deposits, can be very high or very low, and monthly fees vary depending on the company providing your account. Unless you have hordes of money to stow away and not touch for a long time, an account with a high minimum balance just won't work out. Like I mentioned previously, it is very easy to find a high interest savings program with low minimums and no fees.

Checks, ATM Cards, and Other Services

Savings accounts may also offer free checks and ATM cards that allow easy access to your funds. Your account provider might even throw in free reimbursement for any fees incurred from using another company's ATM. However, before you decide on an account, make sure it's not the other way around; you shouldn't have to pay them to use their ATMs!

Because so much banking is now done online, most savings account providers offer online applications that can include some great benefits, like sign-up bonuses or increased interest rates. These applications also allow you to make your minimum deposit by transferring funds from your current bank account, so you never have to open a new checking account. To withdraw from your savings, most accounts allow you to transfer to your checking account, use an ATM card or checks, or pick up the money at a brick-and-mortar location.

All done!

Now that you know your way around savings accounts and MMAs, get out there and find one! The key is to find the savings plan that best suits your needs while providing tons of great benefits. Bankrate.com is one of the best websites to compare interest rates, minimum deposits and balances, and extra features. You can search by top highest yield rates or by state and organize your search results by the features that are most important to you. Plenty of savings accounts are lying in wait, hoping you'll choose them. Just make sure they're FDIC insured first.