What is a Savings Account?
To first understand what is a savings account, we need to understand what it is used for. In plain terms, a savings account is where you keep money for short-term/long-term goals. This account type pays interest on the money you save. This means, do not use your savings account as an expense account. The more money you store and how often determines your interest paid to you on those deposits.
While you can deposit and withdraw money like a chequing account, these accounts are designed to limit withdrawal and help you save. This means, there is a limit to monthly withdrawals and often comes with charges if crossed. These accounts charge for withdrawals, money transfers and can not be used to write cheques with.
Now that we know what is a savings account, let’s look at what interest means on these accounts and the different types that exist.
What is Interest?
Most basic savings accounts offer 0.01% interest. Interest on savings accounts are compounded, meaning that you earn interest on your original deposit amount also known as your principal and any interest accumulated from that onwards. Essentially, your interest earns interest. Most banks have tiered rates on the interest rate depending on your deposit amount.
For Example:
$0 – $9,999.99 = 0.00% interest
$10,000.00 – $49,999.99 = 1.50% interest
Although most savings accounts are free, they are still taxable unless they are registered accounts like a tax-free savings account, (TFSA) or a registered retirement (RRSP).
Different Types of Savings Account
Basic Savings
These are the most basic account type referenced in this article. You earn the smallest interest amount, and it usually doesn’t increase regardless of how much is sitting in the account.
High-Interest Savings
These savings accounts are similar to basic savings account except they offer a higher interest. Your best bet is to take advantage of this because you can maximize your interest accumulation and still withdraw the funds.
Youth Savings
Typically designed for youth under the age of 18 years of age, these accounts are free, allow for a few monthly transactions free of charge and don’t require a minimum balance.
US-Dollar Savings
Like a US-Dollar chequing account, this savings account is designed to hold USD.
Tax-Free Savings Account (TFSA)
A TFSA is a registered investment or savings fund for individuals over the age of 18. Any interest or withdrawals from this account is not subjected to tax. That being said, there is a contribution limit on the account for it to remain tax-free.
Registered Retirement Savings Plan (RRSP)
An RRSP allows you to save for retirement. These funds can accumulate over time without having to pay tax on your appreciation and aren’t subject to tax unless withdrawn from the account. You can also use this account to invest and decrease the amount of income you are taxed on. By placing $10,000 in your RRSP, your gross income would be taxed at your total -$10K
How to Open a Savings Account
Similar to opening a chequing account, you need basic personal information like your name, phone number, and address. You will also need two pieces of identification and a social insurance number is also needed for a tax-advantaged account. Once the account is open, you can start depositing immediately!
Now we know what is a savings account, what interest means on these accounts and the different types that exist. We are now ready to begin saving!
Happy Saving!
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