Kitchaloo.com

A savings account, is one of the most widely held financial products. This quick guide deals with the interest you will receive and summarises the account rules you should look out for.

When you deposit you money in a savings account you are lending your money to a financial institution. In return for borrowing this money from you, financial institutions generally pay you interest. The interest that you receive is based on the interest rate of the savings account in question.

Example: Savings Account Interest

If the interest rate of an account is 4% per year, you will receive 4% of the amount you deposit onto the account in interest by the end of the year. In other words, $1000 deposited into a savings account would result in $40 interest in a years time.

Savings Account rules

Unfortunately savings accounts (and financial products in general) are often not quite as simple as described above. Here are just some of the rules that apply to some accounts:

• Some account require you to maintain the balance within certain boundaries. 
• Some accounts vary the applicable interest rate depending on the balance.
• Some accounts penalise certain activity such as making withdrawals.
• Some accounts only start earning interest after a certain period of time.

So before you open a savings account, make sure that you know the interest rate you will receive on your savings any rules that apply to your account.

Real Returns of Savings Accounts

It is essential to consider the real returns of saving. Most people assume that, if the interest rate on their account is 4%, they are making a return on investment of 4%. However, this doesn't account for the reality of price inflation. As explained in more detail here, inflation means that the money in your account is worth less. In fact, if the rate of inflation is greater than the interest rate on your savings, you are (in real terms) making a loss.

When to Save

As described above, the real returns available on cash are generally speaking not attractive over the long term. For this reason it is generally recommended that people save for any of the following reasons:

• Saving for an unexpected event
• Saving a part of a balanced portfolio of investments
• Saving for a major purchases

Saving Quotes

“All things are cheap to the saving, dear to the wasteful” - Benjamin Franklin

“The art of getting rich consists not in industry, much less in saving, but in a better order, in timeliness, in being at the right spot.” - Ralph Waldo