I know the purpose of a savings account, but how does it work? For example, a "high interest savings account". If you have $100 in savings, after a month, do they apply an intrest rate to it, and you keep the % of interest they apply? Or am i completely wrong?

if someone would explain i would appreciate it!

Most "high interest savings accounts" are accounts that are trying to compete for your business, i.e., your savings account from your local branch, which is probably between 0.25-1%. Some local banks are now offering higher than the national average rates to keep up, but most of the higher rates will be found online.

Take ING Direct, for example. They currently offer an Interest rate of 3.00%. The reason they can offer a higher rate than the national average is that they have few or no branches. All of your business is conducted electronically, usually over the internet. Less overhead, more money to pay in interest to customers.

ING Direct (and most online savings accounts) compound their interest daily and add the total to your account on the last day of the month. Below are examples:

You put $1,000 into an ING Direct account on the first day of the month, paying 3.00% APR, compounded daily.

You check your balance exactly one month later, it will be $1,002.58.

Check it two months after initial deposit, it will be $1,005.17.

Check it after one year of initial deposit, it will be $1,030.88.

These examples are the amounts you would have (your $1,000+ interest) without adding anything more.

Hope this answers your question.


P.S.- the only problem w/these types of accounts, is that you are basically just keeping up w/ the inflation rate, which is 3.50% this year. They are the safest place to keep your money, but in the long run, you won't really make much money on your principal unless your balance is REALLY high and you contribute to it frequently.