When you save up some money and it does not fit in your piggy bank anymore, it may be worth it to open a bank account. When your money is in the bank account, you earn interest on it. Interest rate is given in percent and may differ slightly for different types of accounts and between the financial institutions.
Types of bank accounts
There are several types of bank accounts for individuals: savings account, chequing account and some banks offer student/youth account.
Savings account is an account that allows an individual to safely keep and grow their money.
Checking account is an account similar to a savings account, but it also allows an individual to issue payment cheques. These cheques can be used to pay for goods and services and the funds come directly from the individual’s chequing account.
Student/youth account is a special type of savings account that offers special terms for students and youth to help them get used to banking and start saving.
Opening a new bank account
You can open a bank account online or in person. If you are underage, to open a new account you will need to have a parent/guardian open it for you. A bank will require a picture ID, some forms would need to be filled out and submitted. The bank will review your information and will provide you with a banking card (which is used to pay for goods and services and withdraw cash from a banking machine), as well as online access to your bank account.
Different banks offer different conditions for the accounts.
For example, a savings account could have no minimum balance requirement, but allow only one transaction per month. A transaction is when you withdraw or pay with your money from the account.
Another type of savings account could require a minimum balance (for example, you would have to have a minimum of $2000 in your account at all times) and offer unlimited transactions.
A chequing account usually has a monthly fee and allows a certain number of transactions per month.
It is always a good idea to visit websites of several different institutions and compare account options. Check out this Government of Canada online bank account comparison tool to help with that.
You saved up $500. You are putting into a savings account at 2% interest rate for 1 year compounded annually (meaning accumulated once at the end of the year).
If you do not make any transactions and your $500 are in the account for 1 full year, you will earn 2% of $500 on top of the existing $500.
In order to calculate how much money you will earn in interest, divide 2% by 100% first, to get 0.02. Then multiply 0.02 by $500: 0.02 x $500 = $10
Or you can use the formula
Final Amount = Initial Amount (1 + Interest Rate/Compounding Period)Time x compounding period
Final Amount = $500(1 + 0.02)1 = $510
Therefore, you will earn $10 and your final balance at the end of the first year will be $510.
Sometimes the annual interest rate is compounded every month, every 3 months or every 6 months. We call these “compounding periods”. The annual interest rate is paid into your account on the amount that is in your account at the time. The more frequently the interest rate is compounded, the more interest amount you will earn at the end of the year.
For example, for the same $500, if the 2% annual interest rate is compounded monthly, then the final total amount in the account at the end of the first year will be calculated as follows:
Final Amount = $500(1 + (0.02/12))12 = $510.10
As you can see, with more frequent compounding, the investment earned additional $0.10. This may not seem like a lot, however, on larger amounts and over more years it definitely adds up. Thus, it is always a good idea to inquire about the frequency of interest rate compounding when deciding on the account.