What Is A Savings Account? And How Do I Use One?

In Canada, it’s a breeze to set up a savings account. You’ll need identification, potentially a bit of cash, and some basic paperwork.
Bruce Hodges
November 15, 2023
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Table of Contents

What Is A Savings Account? And How Do I Use One?

Understanding Savings Accounts: Your Guide to Earning Interest on Deposits

Are you curious about the inner workings of savings accounts, how to kick start one, and how it calculates your interest earnings? Let's also delve into a special type known as high-yield savings accounts, which have the potential to significantly increase your interest earnings.

What is a Savings Account?

Imagine a safe space where you can park your funds and watch them grow – that's a savings account. Here, the bank pays you interest for stashing your cash because it uses your deposits to provide loans to others.

So, why isn't this considered a form of theft? Keep reading!

When you think of storing money, several methods come to mind: checking accounts, retirement funds, and yes, even under your mattress. However, the standout feature of a savings account is its magical ability to accrue interest while offering you easy access.

Checking vs. Savings: Key Differences

While a checking account provides immediate access to funds for daily transactions without yielding much (if any) interest, a savings account is designed to gather interest over time. Notably, savings accounts typically won't include a debit card like their checking counterparts.

Consider a checking account as a busy intersection – always moving, with no time to grow. In contrast, a savings account is a quiet, nurturing garden where your money matures. It’s your go-to for future aspirations, such as a honeymoon or a vehicle down payment, and a reassuring financial cushion for unforeseen expenses.

How a Savings Account Operates

To activate a savings account, simply fund it after opening, and the bank, in turn, rewards you with interest. This concept may puzzle some: the bank utilizes my money? Absolutely, and that's the essence of banking – they pay interest on deposits and charge interest on loans, all while safeguarding a sum ready for your withdrawal requests.

The Allure of High-Yield Savings Accounts

A high-yield savings account is a type of account that offers interest rates superior to those of standard accounts. Various financial institutions impact the interest you can earn, with traditional banks often offering less than 1% due to their physical overheads.

The Online Advantage

Online savings accounts, free from the burdens of physical branches, often offer more competitive interest rates. Without the brick-and-mortar expenses, these online entities can afford to provide you with higher rates, enhancing your savings growth.

The Merits of Owning a Savings Account

Ever wondered why people don't just pour all their funds into investments? There are several reasons for maintaining a savings account:

  • Cushion for emergencies: Ideally, your account should encompass 3-6 months of living expenses.
  • Goal-focused savings: Perfect for accumulating funds for significant acquisitions without resorting to credit.
  • Effortless earnings: Enjoy passive income through accrued interest.
  • Expense management: Automate deposits to help curb spending.
  • Uncompromised security: Savings accounts are the epitome of financial safety.

Setting Up a Savings Account

In Canada, it’s a breeze to set up a savings account. You’ll need identification, potentially a bit of cash, and some basic paperwork. The process is swift online, possibly more so than at a physical bank branch.

What you'll need:

  • Proof of identification and SIN.
  • An initial deposit, which varies by the institution but can be as low as $1 with some banks.

Calculating Your Interest

Discerning the exact interest you’ll accumulate is straightforward if you have the right information. Understand your deposit amount, the interest rate, the frequency of interest application, and the duration your money will be invested. For optimal ease, employ an online savings calculator to crunch those numbers.

Bruce Hodges
Bruce, Founder and CEO of Parachute, worked for several of Canada’s top Banks, published research for the Canadian Bankers Association, and taught E-commerce Strategy in Wilfrid Laurier University’s MBA program. His first start-up built credit solutions for the likes of National Bank, Fair Isaac, and Ford Credit globally. Prior to starting Parachute, Bruce was COO of Foresters Financial, and EVP Transformation at CIBC, one of Canada’s top 5 banks. Bruce founded Parachute to disrupt the financial wellness space taking on payday, and high interest predatory lenders, with the intent to bring at risk Canadians back from the brink to good financial health.
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