Everything you need to know about savings accounts

How do I use a savings account?

Savings accounts are pretty similar to chequing accounts when it comes to how they work. They give you the flexibility to move your money in and out whenever you need it.

But there might be some transaction limits or per-item fees associated with the account, such as a fee when you make a withdrawal. It’s important to be aware of and understand the fees, features and functionality of your accounts.

Want to make saving a breeze? Set up recurring transfers (also called automatic deposits) to help move the needle! On payday, move a portion of your paycheck straight into your savings account. No more manual transferring – it's all done for you. Over time, your automatic deposits can add up and boost your savings. Think about the possibilities of effortlessly growing your savings. How cool is that?

How is interest paid?

Savings accounts are a fantastic way to make your money work for you. Thanks to compounding interest, depositing even small amounts into your savings account can add up over time.

Defined as the interest you earn on interest, compound interest means that when you put your hard-earned funds into your savings account, you’ll earn interest on the principal (the initial amount you deposited) plus the interest that accumulates over time.

Now, here's the key: how often that interest is compounded can make a big difference. Whether it's yearly, monthly, or even daily, the more the interest is compounded, the faster your money will grow.

Let’s look at an example. Say you deposit $1,000 in a savings account that pays 1 percent annual interest. After a year, you’d earn $10 in interest. With the help of compound interest, in the second year you’ll earn 1 percent on $1,010 — principal plus the interest. And on and on it goes.

Keep in mind, each savings account has its own requirements – some may require a minimum deposit to start earning interest. Also, there might be tiered interest rates or limited-time promotional rates, so it's worth confirming the requirements for the savings account before you open it.

In the case of one of BMO’s most popular savings accounts, the Savings Amplifier Account, interest is calculated on the daily account closing balance and paid monthly on the first business day of the following month, based on annual interest rates. Think of it as a monthly boost to your savings. Tracking your balance on a daily basis means you earn every bit of interest you deserve.

Do saving accounts have fees?

Next, let’s examine the fees. While some banks may charge a monthly fee to maintain a savings account, the account may also have a monthly transaction limit, as well as fees for withdrawals or transfers beyond the limit set by the bank. At BMO, there are no monthly fees for any of our savings accounts.

It all comes down to the requirements for the savings account you open. Be sure to ask your bank representative questions and do some research to understand all the fees, features and benefits of the account before you open it. Plus, as with any bank account, be mindful of overdraft charges and interest if a transaction, withdrawal or transfer reduces your account balance to negative. Investing in overdraft protection may be a smart way to avoid those charges if you overdraw on your account.  

The top benefits of a savings account

Aside from being a handy tool to save, a savings account can come with even more perks to enjoy. Let's summarize the top benefits:

• You can earn interest on your savings. Open a high interest savings account like the BMO Savings Amplifier Account to maximize your earnings. The BMO Savings Amplifier Account also includes no monthly fee, no minimum balance required and unlimited transfers between your BMO accounts.

• It’s a safe place to store your personal savings and help meet your short and long-term goals. Thanks to the straightforward setup of savings accounts, these tools are convenient and easy to use. You can also track your savings using digital banking features such as our Savings Goals feature.

• Your funds are easily accessible. As opposed to some other savings tools, your money is available to you anytime you would like to access it.

• Access your account online anywhere, anytime through online banking when you open a savings account online, which only takes a few minutes at BMO.

• Your funds are federally insured thanks to the CDIC.

• You can automate your savings. To maximize your savings, set up your account so that it automatically transfers funds from your chequing account to your savings account.

• You can build an emergency savings fund so you’re covered in the event of a sudden expense or emergency.

What are the limitations of a savings account?

By now we can all agree that savings accounts offer a practical solution for anyone looking to hold and safely grow their money. The benefits are many, but that doesn’t mean it’s the answer for everyone. Understanding the potential drawbacks will ensure you make the right decision. Here are some limitations and requirements to consider before opening a savings account:

• Lower interest: Along with low risk comes lower interest rates. If you’re looking to earn greater interest on your account, you may opt to go with a different savings product, like an investment account. Examples include BMO's InvestorLine Self-Directed platform.
  
  
• It’s taxable: Unlike some other savings tools like the Tax-Free Savings Account, the interest you earn in a savings account is not tax deductible.

What types of savings accounts are available in Canada?

There are various types of savings accounts in Canada, each with unique features and purpose, including:

A basic savings account

A basic savings account, like the BMO Premium Rate Savings Account, is a great option for earning a little bit of interest on your account balance while offering the flexibility you need. Typically, they have low or no minimum balance requirements, making them accessible to many savers. They serve as a solid foundation for your savings journey, allowing you to grow your money at your own pace. Learn more about the golden rules of saving with a BMO Premium Rate Savings account.

A high-interest savings account (HISA)

If you’re looking to maximize your earnings using a savings account, a high-interest savings account (HISA) may be worth a look. A HISA, like the BMO Savings Amplifier Account, offers a higher interest rate on the account balance than a traditional savings account. The HISA is low risk, which cuts a nice balance between a low-interest savings account and a more complex investment-focused account.

Specialized savings accounts

If you’re a business owner, a business savings account to support your venture might be a good idea. 

Investment accounts

Of course, reaching your financial goals is possible without a savings account. In fact, some investment alternatives can be even better suited to your situation. Some examples include:

• A Tax-Free Savings Account (TFSA)
• A Registered Education Savings Plan (RESP)
• A First Home Savings Account (FHSA)

What’s the difference between a savings and chequing account?

Banks provide a variety of product options to help you reach your unique financial goals. Not surprisingly, bank accounts – specifically chequing and savings – are the most popular. But how would you distinguish between the two?

The main differences between a savings account and a chequing account comes down to how many transactions you can make per month, the fees you incur, and the potential each offers to earn interest. Let’s look a bit deeper.

A chequing account is best used for day-to-day transactions. They’re ideal for things like paying bills, ATM withdrawals, buying items online, Interac e-Transfer^®§ transactions and in-person purchases via a debit card. They’re known as deposit accounts and are designed to hold your money for short-term needs - which explains why you’re typically allowed a high number of transactions per month. But remember, you don’t earn any interest on the balance.

A savings account, on the other hand, is designed as a savings tool: you earn interest on your account balance. You may have to pay per-item fees for completing transactions, however, which is why it’s best to keep transactions infrequent.

Reach your savings goals today

Savings accounts provide a safe place to deposit your money. They’re easy to set up, easy to use and can help meet your unique needs, offering a great opportunity to earn interest every time you save while keeping funds accessible. Savings accounts are a great choice whether you’re pursuing short-term or long-term financial goals.