What is a savings account, and why do you need one?

Savings accounts are an essential part of your overall personal finance strategy. They can help you manage your money while growing it at the same time. 

But what is a savings account exactly? How does it work, and how do you choose one? Here, we go over some important points and key questions to help you understand this important financial tool.

What is a savings account?

A savings account is a bank account for, well, saving. It's designed for situations where you want to put money aside for future expenses — like purchasing a car, paying your university tuition, or building an emergency fund for unplanned costs. 

While there's no hard rule exactly, savings accounts are generally not intended to be used for day-to-day spending transactions. Chequing accounts are a better choice for that purpose: they're designed for transactions covering your everyday expenses. 

Savings accounts are intended to be a place where your money can grow, so ideally you want to accumulate a balance rather than constantly use the money. 

A savings account is a great spot to keep money that you don't need right away, but that you want to be able to access quickly and conveniently when you're ready to withdraw. 

How does a savings account work?

A savings account is a bank account where you can keep money until you need it. When you have money to save, you deposit it into your account. Then, you leave it there until you need it.

Nowadays, there are many ways to fund your savings account, and you might not even have to get up off the couch. For instance, you can deposit money into your Tangerine Savings Account by:

• Transferring funds from another account, either at Tangerine or another bank
• Setting up an Automatic Savings Program (ASP), where you designate an amount that is deposited at a regular frequency, either daily, weekly, biweekly or monthly.
• Setting a Money Rule, such as "Pay Yourself First," where a certain amount, say $100, automatically goes into a Savings Account whenever your paycheque comes in.
• Setting a Goal, such as Debt Repayment, with regular payments into a Savings Account until you reach a designated amount.
• Depositing a cheque using our Mobile Banking app.
• Receiving money by Interac e-transfer®.

Most savings accounts, such as Tangerine Savings Accounts, pay interest. This means that the bank will pay you money just for keeping cash in your account. Usually, that interest is paid once per month, and the amount you receive is calculated based on the applicable interest rate and your account balance. 

Bonus: the interest you earn is compounded. This means the interest you receive one month is included in your account balance the next time interest is calculated. (More on this below.) Pretty sweet, right?

Benefits of having a savings account

You might think it's simpler only to have one bank account, but there are a lot of benefits to having a savings account in addition to the account you use for your day-to-day spending. 

Some of these benefits are practical. For example, savings accounts usually have higher interest rates than chequing accounts. They're also a flexible, easy-to-access place to put money aside. 

There are psychological benefits, too. They can be a valuable tool to help you organize your finances and budget for the things you want/need. 

For instance, let's say you've tasked yourself with creating an emergency fund. (Smart idea!) Your goal is to save $1,000 in the next five months, which means putting away an average of $200 monthly. 

Yes, you could build that fund up inside your chequing account and watch your balance increase each month. But you'd have to do the math on which money is savings and which is available to spend any time you checked it. Plus, it's all too easy to spend that money when it's right in front of you. By transferring your emergency fund savings to a separate savings account, it's out of sight, out of mind—and easy to track, so you can give yourself a gold star every time you reach an inchstone or milestone.

Another benefit of savings accounts? Just like chequing and other accounts, so long as the bank is a CDIC member institution, they're eligible for Canada Deposit Insurance Corporation insurance, up to $100,000 per institution. 

With Tangerine Savings Accounts, Clients also get access to tools that help make it simple to grow their savings and reach their goals.

Common questions about savings accounts

Are you curious about the details of how savings accounts work? Here are the answers to some common questions.

Are there fees associated with a savings account? 

Every bank account is different, so this is a question you should ask every time you open a new account. At Tangerine, you won't be charged monthly fees and there is no minimum balance requirement on your Savings Account.

Are there any benefits to having more than one savings account? 

This kind of depends on how your brain works. Some people like the simplicity of having only one savings account, while others like to have a different one for each purpose: one for travel, one for school, one for Taylor Swift tickets, etc. 

The main benefit of having multiple accounts is to help keep you organized. But if you do this, make sure you choose a bank like Tangerine with no monthly fees or minimum balance requirement, so you don't have to pay extra to have more than one savings account. 

Can I keep different currencies in a savings account?

Each savings account is tied to a single currency. Your primary savings account will probably be in Canadian dollars, but you might also want to open a US dollar savings account if you want to save in USD.

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

It's understandable why someone might confuse these: after all, a savings account and a tax-free savings account sound pretty similar.

A regular savings account is an account that isn't registered with the Canada Revenue Agency (CRA). A tax-free savings account (TFSA) is a CRA registered plan that has certain tax benefits. 

Your TFSA can contain different types of assets, such as stocks, bonds, GICs, ETFs, or mutual funds — and savings accounts. In other words, a TFSA is kind of like a bucket that you can put multiple things in, and one of those might be a savings account. When you put funds into a TFSA, the money you earn, such as interest, grows tax-free. In a regular savings account, the interest you earn is considered taxable income.

However, there are specific rules about TFSAs, like how much you can contribute (i.e., put in) that you'll need to be familiar with to make the most of your account.

Can I keep a savings account in my RRSP plan?

Just like a TFSA, an RRSP (called an RSP at Tangerine) is a bucket that can hold multiple kinds of investments, and one of those is a savings account. In general, for long-term goals like retirement, many people choose to invest instead of simply putting money in a savings account. But there are certain cases where it makes sense to have an RSP savings account, such as if you're just starting out with retirement savings and aren't sure where or how to invest yet, or if you're not comfortable with the risk associated with other types of investments.

How interest works on a savings account

When you have a savings account that pays interest, as most do, that means the bank will pay you a specific percentage of your account balance, typically each month. Each account has its own interest rate, which can change over time. 

How is that interest rate determined? It changes with the overall economy, and it can be a bit complicated, but the short version is this. 

Every year, the Bank of Canada (BOC) — not an actual bank you can set up an account with, but an independently run crown corporation — makes a series of interest rate announcements. (There are eight of them scheduled in 2025.) This is where they set their "policy interest rate," which is an official rate that reflects the country's economic situation. Interest rates at banks and other financial institutions around the country—like rates on mortgages, student loans and, yes, savings accounts—are set in response to this policy interest rate. Interest rates aren't the same at every bank, but they tend to follow the same upward or downward trends, based on what the Bank of Canada policy rate is.

Why is this important? The higher the interest rate on your savings account, the more interest you earn on the money you keep there. 

You earn even more interest on your savings because of compounding. When interest is compounded, it means that you accumulate interest on both the amount of money you deposit in the account (the principal amount) plus any previous interest earned. In other words, you earn interest on top of interest. For instance, let's say you put $1,000 in your savings account in January, and at the end of the month, you earn $4 in interest. Your balance is now $1,004. Next month, the bank will calculate your interest on the entire new balance of $1,004, which is more money than if they'd calculated it on $1,000. (Note that the specifics of when and how interest is calculated and paid out vary from account to account.) 

The more money you have in your account and the higher the interest rate, the more compounding benefits you have.

Chequing vs. savings accounts: what’s the difference?

The difference between chequing and savings accounts is pretty simple. Chequing accounts are designed for day-to-day spending transactions, while savings accounts are designed to help you save for a rainy day or a specific goal.

Chequing is kind of a retro term, but historically, the account got its name because it was the account you wrote cheques from. We don't do that as much anymore, but the principle is the same, just with electronic transfers and direct deposits instead of cheques.

Savings accounts, on the other hand, are specifically meant for saving, which means you're putting money aside to grow for a future purpose. 

When you research a bank account, you'll notice it comes with a list of details to help you understand how best to use it. For instance, it might come with a certain number of free debit transactions or ABM withdrawals per month, and it may have minimum balance requirements or specific fees and interest. Generally, chequing accounts are structured for frequent transactions and earn little or no interest, while savings accounts include fewer no-fee transactions and higher interest rates. When you're opening a new account, make sure you're choosing one that's right for your needs.

Tips for making the most of a savings account

So you're ready to open a savings account. Great! Now comes the fun part: making it grow. Here are some tips to help you make the most of your new account.

• Review and compare interest rates, and choose an account that offers the best opportunity to grow your money without paying unnecessary fees.
• Link your chequing and savings accounts online to make it easy to add to your savings account whenever you have extra cash, like if you sell some clothes or furniture online.
• Try a "set it and forget it" approach to saving: set up automatic transfers from your chequing account to your savings account. Try programming this for right when your paycheque lands in your account, so you don't have a chance to spend that money first.
• Set up your bank's app on your phone so you can keep track of how your money's doing.
• As your savings account balance grows, consider transferring funds into registered accounts like an RRSP/RSP or TFSA.

That's it! You're now a savings account pro — give yourself a pat on the back and a gold star. Now you can open a savings account and get moving on your savings journey. You can start by opening a Savings Account with Tangerine: get the advantage of no monthly fee and a great interest rate with no minimum balance.

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