Opening the Account
For those looking to earn more than the standard interest rate of a savings account, a high-interest savings account is an option offered by banks. A high-interest savings account requires a person to keep a certain minimum amount of savings in the bank. While a person can contribute more than the minimum amount of money to the account, taking out less than the minimum amount can result in penalties, such as a reduced interest rate.
When a person opens the high-interest savings account, she contributes at least the minimum account required by the bank. The bank then provides the person with an interest rate the bank will pay for in return for the account holder keeping the money in the account. The account holder then agrees on several additional stipulations, such as the amount of withdrawals made over the course of time or the number of transactions, such as moving money out of the account and into another.
Bank Advantages
There are a few reasons why banks are able to offer higher interest rates on these types of accounts. The first is that by guaranteeing you will leave in a certain amount of money, the bank is able to lend more money to other people because they are assured that your money will remain in the account. In an ordinary savings account, a person can withdraw money at any time, which means banks are less able to lend on these accounts. Additionally, limiting the amount of withdrawals and transactions cuts down on administrative costs the bank must incur. The bank can then compensate the account holder by awarding a higher interest rate.
Computing Interest Earned
Once a person opens the account, banks most often compute interest on a quarterly basis. For example, imagine you must keep at least $5,000 as a minimum balance in your high-interest savings account at an interest rate of 6 percent. After 3 months, your savings account would have earned $300. At the end of the year, you would have earned $1,200 just by keeping your money in the bank.
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