A savings account is a type of bank account in which you may place your money for security, accounting purposes and financial growth. As you keep money in your savings account, your bank will pay you interest. High interest savings accounts are exactly like other savings accounts except that they pay account holders higher interest rates.
Banks make a lot of their money by issuing loans to borrowers that borrowers must repay in installments, plus interest. Typically, interest rates that borrowers must pay for these loans range from about 4 percent to 20 percent, depending on the level of financial risk involved. However, to loan money in this manner, banks must first have money to lend. For this reason, banks operate savings account programs. When clients put money into savings accounts, banks lend that money to borrowers and give part of the interest gained back to savings account holders. As of 2011, any savings account that yields its holder an interest rate of 1 percent or higher could be considered a high interest savings account. The interest rate may also be called the APY, or "annual percentage yield."
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Because banks want to encourage clients to put money into savings accounts, they may not charge service fees. However, some charge these fees because they prefer to have a small number of accounts with large balances over having a large number of accounts with small balances. This is because banks must spend about the same amount in administrative costs for an account with a balance of $100 as an account with a balance of $1,000,000. For a holder of a million-dollar account, an $8 monthly service fee is negligible, especially when the account is earning interest. For a high-interest savings account, that would be at least $10,000 per year. For a holder of a $100 account, though, paying such a service fee may prompt him to deposit more money or close the account.
Minimum Deposit And Balance
Just as banks may charge service fees for their high-interest savings accounts, they may require minimum deposits as well -- and for the same reasons. The minimum deposit into such an account could be $100, $500, $1,000, $5,000 or any other amount that the bank decides on. Your bank may also require you to keep a minimum balance in the account, charging service fees only if your balance falls below that level.
Something you must always consider when putting your money into a savings account is inflation, which is the devaluation of currency due to the printing of more currency. If the economy grows, the central bank can print more money without causing inflation as long as it matches the growth of the economy. Generally, though, the central bank prints money a little faster than the economy grows. For this reason, your 1 percent interest rate usually does not show the actual change in wealth that you may be experiencing. If inflation occurs at an average of 4 percent and you are only getting 1 percent in interest, you are actually losing wealth even when you have your money in a high-interest savings account. For this reason, you may consider putting your money into more lucrative safe investment instruments, such as mutual funds.