A savings account is an account that pays interest on the money you deposit, also known as the principal. Many people who open a savings account also have a chequing account for their day-to-day banking.
What to consider when choosing a savings account
When shopping around for a savings account, pay attention to the following features and considerations.
You may need to deposit a minimum amount to set up certain savings accounts.
Some accounts may need you to keep a certain amount of money in the account to earn interest. For example, in some cases you might need to keep at least $1,000 in the account before it pays interest.
You earn interest on the money in your savings account. Each month, any interest you earn will go directly into your account. The higher the interest rate, the more money you‘ll earn. Consider how much interest, if any, your financial institution will pay on your account balance.
Sometimes a financial institution may offer high-interest introductory rates. These run for a certain length of time. After the period is up, the interest rate may then be lower.
Make sure that you:
will still earn a good rate after the introductory period ends
understand the terms of such offers
You don’t usually pay monthly fees to have a savings account.
You may still have to pay fees for transactions such as withdrawals or transfers. Most savings accounts offer a limited number of transactions. Some savings accounts won’t charge you transactions fees if you keep a minimum monthly balance.
Read your account agreement and find out what the service fees are for withdrawals and transfers.
Use the Account Comparison Tool to find the savings account that best suits your needs.
Accessing the money in your savings account
A savings account usually offers quick and easy access to your money for withdrawals and transfers.
If you use your account mainly to save money, you’ll likely only need to make transactions from time to time.
If you need to withdraw money from your account, consider the following:
can you access your money from a nearby automated teller machine (ATM)
can you manage your account using online banking
If you have to transfer money from your savings account to a chequing account before you can withdraw, it may take extra time to access the money.
How your financial institution calculates interest
Carefully examine the terms of the account to find out how your financial institution will apply interest. Some financial institutions apply two or more different interest rates to your balance.
Find out if your financial institution will pay the higher interest rate:
on all the money in your account
on all the money in your account only once your savings go above a certain amount
only on the part of your balance that is above a certain amount
Bank 1 might pay:
1% on the first $1,000 of your balance, and
2% on amounts more than $1,000
Bank 2 might pay:
2% interest to the entire amount of your balance as long as you keep at least $1,000 in your account
Bank 3 might not pay interest during a month where you take out money.
With compound interest, your initial deposit, or principal, earns interest. The money you earn in interest is added to your savings. You'll continue to earn interest on your total savings. This means the interest you earn will earn interest. The more often your interest is compounded, the more your account balance will grow.
Financial institutions usually advertise a compound interest rate for a savings account.
Usually the advertised interest rate is annual. However, accounts may compound interest monthly or daily. Accounts that compound interest daily earn interest faster than accounts that compound interest monthly.
Ask your financial institution how often it compounds the interest paid to your account.
Example of how compound interest works
Suppose you deposit $100 into your savings account every month. Your money starts to earn interest as soon as you deposit it. Your account has an annual interest rate of 2%, compounded monthly.
This means that, each month, you'll earn about 0.167% (which is 2% divided by 12 months) on your balance. This includes any interest paid in the previous months.
After one month, you have $100 in your account and will earn only $0.17 interest on that balance ($100 x 0.167%). After the second month, your interest will be calculated based on the $200 you’ve deposited, plus the $0.17 interest earned in the first month.
On a balance of $200.17, you’ll earn $0.33 in interest ($200.17 x 0.167%).
Each month, the amount of interest you earn will increase. By the end of the first year, you’ll earn a total of $13.08 in interest.
The longer you continue to save and earn compound interest, the faster your savings will grow.
Figure 1: How compound interest adds up over time as you make more deposits into your account.