If you are thinking of saving for a vacation, an important event or just as a safety net against unexpected expenses, you might wonder how the interests of the savings account work. Let’s explore…
How does the interest of savings work?
When you have money in a savings account, you receive a credit known as interest, based on the amount of money you have and the percentage rate at which you get paid. What happens in this process is that the bank is borrowing your money for a while and that’s why it pays you for it. There are three types of interest that can be applied:
Compound interest: normally paid annually and interest accrues on those of the previous period. It’s a great way to grow your money for a longer period of time, but obviously, you would lose it if you changed banks.
Annual interest: paid every year, usually when the savings account expires or is renewed.
Monthly interest: Applies every month, usually to checking accounts that pay interest, and can be a quick way to generate income.
When comparing savings accounts, interest rates are generally shown as an Annual Equivalent Rate or Annual Effective Rate (APR), which indicates the percentage you would earn after one year.
The most advantageous savings account types
In the market you can find different types of savings accounts, and the ones that usually offer the most benefits are usually:
– Those that offer compound interest.
– Those that offer greater advantages to customers who already have another account in the bank.
– Fixed-term accounts, that is, those that do not allow you to withdraw your money for a fixed amount of time, usually in the long term
– Those that offer a high rate but only in smaller amounts, such as checking accounts or government incentives that only reward up to a certain limit. In these cases the most advisable thing would be to distribute your savings among several products.
Bonus decreases or the interest rate decreases
The important thing to keep in mind when hiring a savings account is that, if your interest rate seems competitive, it may be because it is variable or because it has a first year bonus. Keep in mind that when the bonus decreases or the interest rate decreases, your savings income will change, so be prepared to compare prices and move your money if necessary.
Similarly, if you choose a fixed rate account, your interest rates may be higher, but if the rates suddenly increase in the market, you will not receive this benefit. You may also be penalized if you want to access your funds before the account expires, so leave at least a reasonable portion available for emergencies out of the deadline.