How do interest rates work for a savings account?
I'm about to get my own bank account. I wanted to get a debit card at first, but a friend told me that if I use a savings account, I can earn interest. But I don't really know how it works. And she doesn't quite know either. Btw I'll be 14 when I get it.
Most interest rates at banks are compounded on a regular scale, either daily, monthly, quarterly, or yearly. What that means is that the annual percentage yield (APY) is based off of what you would make in a given year.
For example: let's say you had a savings account with $1000 and a 5% APY (good luck finding one of these now!). Essentially, over a 12-month period, the bank would give you the equivalent of 5% of the total balance if the balance stayed stable ($50 split over the year). So, if you didn't put any more money into the account, and the interest was paid out, let's say quarterly, every 3 months you would get a $12.50 interest payment.
Since most balances are variable (i.e. nobody keeps the same amount of money in the account) and interest changes the principal (once that first $12.50 payment goes in, your NEW balance is $1012.50, and the APY of 5% is based off of THAT, and not $1000 anymore) it can be sort of confusing. The benefit is that you are ALWAYS making money (even if it is only a penny) as long as you have the savings account open.
The downside is that it normally doesn't have as easy access as a checking account (e.g. no check cards usually) unless it is linked to another account (either checking or money market). You can usually get ATM access, but many savings accounts have minimum balance requirements for opening or maintaining.
Good luck.
