Interest-bearing savings accounts provide individuals and businesses with a source of passive income on saved money. Banks and other financial institutions offer these accounts in hopes of gaining deposits, which in turn the bank can invest for profits. The most common interest-bearing savings accounts include a standard savings account, money market deposit accounts, and certificates of deposit. Each has specific features with some benefits and some drawbacks. Individuals usually have options of selecting one or more of these different types of accounts when saving money at a bank.
Standard savings accounts generally offer the lowest financial return among all the types of interest-bearing savings accounts. Individuals and businesses can set up the account by filling out some basic paperwork and placing money into the new account. In most cases, the savings account offers less than two percent annual compounding interest in return for keeping money in the account. Some accounts may require a minimum balance, such as $1,000 US Dollars (USD) in order to earn interest. These types of general savings accounts typically offer higher interest than those that do not have minimum balance requirements.
Money market deposit accounts usually offer higher interest rates on money saved, often between three and four percent, though lower interest rates are possible. This account also has more restrictions, such as fewer withdrawals or a small number of checks written against it during a monthly period. Banks may have other restrictions on these types of interest-bearing savings accounts as well. The purpose of the account is to induce consumers to use the accounts by leaving larger sums of money in them for longer time periods. This in turn gives banks a better opportunity to invest the money into financially viable projects.
Certificates of deposit are often the most restrictive of all the interest-bearing savings accounts. With these accounts, an individual or business agrees to leave the money in the bank for a set period of time, from a few months to a few years. Of course, a certificate of deposit offers higher interest rates for users due to the requirements associated with the account. In most cases, these interest-bearing savings accounts also have tiered interest rates, with smaller rates for short-term deposit times and higher rates for long-term deposits. Attempting to make a withdrawal or cash out the account can result in lost funds as the bank may not pay out earned interest or even repay the entire amount placed into this account.
