What is a Savings Account?

Have you ever wondered what is a savings account? Obviously, it’s a bank account for savings, but did you know that it also has many additional features that could help you with your finances? How you use your savings account is up to you, but if you know how they work, you can maximize your savings.

What is a savings account?

As the name implies, a savings account is meant for savings. As an incentive, your financial institution may pay you interest on the money you’ve deposited. While this may seem odd, it’s actually how banks operate. The deposits they take in get loaned out to other customers at a higher interest rate.

Generally speaking, savings accounts are meant for short-term savings and investments. It’s highly unlikely you’d use your savings account for day-to-day transactions since that’s what a chequing account is for. You also wouldn’t use your savings account for long-term savings since the interest you make is often less than inflation. In other words, you’d be losing money if you keep your cash in your savings account.

That said, savings accounts are still convenient. You can deposit and withdraw cash from your account at any time. This can be done online, at an ATM, in a branch, or even through e-transfers. However, savings accounts at brick-and-mortar banks typically give you a limited number of transactions unless you get a premium savings account.

It should be noted that savings accounts available at brick-and-mortar financial institutions are slightly different from high interest savings accounts offered by online banks. While the changes are subtle, they can make a major impact on your finances. 

What are the different types of savings accounts?

First off, savings accounts can be opened for an individual or multiple people. When you open an account for more than one person, that’s known as a joint account. These types of accounts can be handy for people who are looking to manage their finances together. 

Besides individual and joint, you’ll typically come across the following types of savings accounts:

• Basic savings account – Every financial institution will usually have a basic savings account that has no monthly fee, but often comes with a limited number of transactions. This number can vary, but it can be as low as 1 transaction per month.
• Premium savings account – Many of these accounts have no monthly fee and give you unlimited online transfers to other accounts at the same financial institution. Generally speaking, the more money you keep in this account, the higher your interest rate will be.
• High interest savings account – Online available with online banks, high interest savings accounts offer no monthly fee, unlimited transactions, and a higher interest rate.
• Foreign currency savings account – Some financial institutions offer savings accounts for foreign currencies such as U.S. dollars and Euros.

Note that a transaction is when you withdraw funds from your account. If you have an account that offers free transfers to other accounts, you could transfer your money to your chequing account first. Since these transfers usually happen right away, you could immediately withdraw the funds without having to pay a fee as your chequing account would likely have more transactions available.

What can you do with a savings account?

Since savings accounts are similar to chequing accounts, you can have almost identical functionality. The most common transactions you would perform with your savings account include:

• Deposit cash and cheques
• Direct deposit from your employer and the government
• Withdrawals in branch, at ATMs, and at select merchants
• One-time payments for goods, services, or bills
• Recurring pre-authorized payments such as your mortgage
• Transfers between bank accounts
• INTERAC e-Transfer
• Global transfer
• Bank drafts

Keep in mind that a savings account is not typically used for day-to-day banking since you only get a limited number of transactions. It’s really meant for short-term savings where you can earn a little bit of interest.

What are savings account fees?

As you can imagine, a savings account does come with fees. Since you have a limited number of transactions, your fees can add up quickly if you’re not paying attention. Look out for the following fees when using a savings account.

• Monthly fees – Depending on the type of account you have, this will range from $0-15 a month.
• Transactions – Once you exceed your monthly transaction limit, you can expect to pay $1-2 for each additional one.
• INTERAC e-Transfers – Most chequing accounts count INTERAC e-Transfers as a regular transaction, but some still charge $1-2 for each one.
• ATM Withdrawal – When using an ATM that’s not part of your financial institution’s network, you’ll likely pay $1.50-3 for each transaction.
• Paper statements – Online monthly statements are free, but if you want them to mail you a physical copy, you’ll likely pay $2-5 each month.
• Non-Sufficient Fund (NSF) – If you withdraw more money than you have in your account, you’ll likely be charged a fee of $40-50.

It’s true that these fees can be a bit ridiculous, that’s why many people have switched to a high interest savings account with an online bank. They typically have no fees at all.

Are savings accounts safe?

If your savings account is held by a financial institution that’s a member of the Canada Deposit Insurance Corporation (CDIC), then your deposits are incredibly safe. CDIC insurance covers eligible deposits up to $100,000. Since savings accounts qualify as eligible deposits, your money is very secure.

To be fair, $100,000 may not seem like a lot if you’re saving for something big such as a home down payment. Fortunately, CDIC covers multiple accounts such as individual and joint accounts. That means if you’re saving with your partner, you would have access to $300,000 in CDIC protection if you each had an individual savings account and a joint account.

In addition, the $100,000 CDIC insurance limit applies to each CDIC Member. In other words, if you need additional protection, you could open another account at a different financial institution.

Do savings accounts have debit cards?

Yes, savings accounts have a debit card. That said, your debit card would be the same one that you use for your chequing account. Your financial institution would just link your savings account to the same card. When you use an ATM, you’ll be prompted to select chequing or savings. Just choose the one you want to access.

Note that some of the best high interest savings accounts offered by online banks provide a debit card, but not all of them.

Does a savings accounts build credit?

Unfortunately, a savings account does not build your credit score since it’s not a form of credit. If you’re looking to improve or maintain your credit score, you should apply for a credit card. 

For reference, your credit score is a number between 300 and 900. The higher the number, the more creditworthy you are. It’s in your best interest to maintain a good credit score since it’s one of the first things lenders look at if you ever need a loan.

How do you open a savings account?

Opening a savings account can be done at your own convenience. Financial institutions now allow you to open an account online, over the phone, or in-branch. In most cases, you only need to meet the following eligibility requirements:

• At least the age of majority in the province or territory where you reside
• The account must be opened in your own name
• You’re living in Canada

Also note that when opening an account, you’ll likely need a valid email address and ID