Savings Account

A savings account is an account held at a financial institution that allows the account holder to earn interest on monetary deposits.

A savings account is an interest-bearing deposit account at a financial institution. A savings account is also known as an emergency fund. Consumers can open savings accounts in person by going to a local bank branch or credit union location. But a person may also apply online for an online savings account.

Online savings accounts are secure savings accounts provided by financial institutions that typically do not have brick-and-mortar locations. However, they usually offer the same benefits as traditional savings accounts. The only difference is the online process.

While a person may open a savings account in person, they may still have online access. Many financial institutions with store locations still allow customers to manage and monitor their accounts through the online website or mobile banking app.

How Savings Accounts Work

A savings account works by keeping a consumer’s finances secure and accessible. While the money is in the account, an account holder can earn interest payments on the total balance.

When a person first opens a savings account, they will be asked if they want to make a deposit. Some financial institutions require a minimum deposit, which is an amount necessary to open an account. The amount you need for an initial deposit varies but can be as little as $0. If you do not want to deposit money to open a savings account, look for a financial institution offering accounts with no minimum deposits.

Depositing money into a savings account can be made through a variety of ways, such as:

  • Initiate an ACH (Automated Clearing House) deposit.
  • Deposit cash or checks at a bank or credit union.
  • Deposit cash or checks at an ATM.
  • Deposit checks using an app on your smartphone.
  • Complete an online transfer between accounts.

Financial institutions use the money customers keep in their savings accounts to conduct business, which is why you can earn interest payments on deposits. Interest payments are typically paid monthly, although the frequency depends on the type of savings account you have and the bank you work with. The interest rate you receive depends on the bank and the rates set by the Federal Reserve.

Once you establish a savings account, pay attention to your balance amount. Some financial institutions require a minimum balance, which is an amount that must be kept in the account daily, weekly, or monthly. If the balance is lower than the minimum balance requirement, you will have to pay a monthly service fee. The cost of a monthly service fee varies but can add up to a significant amount if you do not add money to the savings account. To avoid paying excess fees for having a bank account, look for a bank or credit union that has no minimum balance requirement.

The number of times an account holder can withdraw funds from their account depends on the type of savings account they have. For example, the Federal Reserve requires most financial institutions offering savings accounts to allow six convenient monthly transactions. Any more than that, and you will have to pay a fee. Keep in mind that certain transfers may count as convenient transactions, such as wire or overdraft transfers.

How Interest Works on Savings Accounts

If you are interested in opening a savings account, knowing the difference between simple and compound interest is critical.

  • Simple Interest — Interest is calculated using the principal amount of the loan and charged monthly, quarterly, or annually. Simple interest does not change for the duration of the account or loan contract.
  • Compound Interest — Compound interest is calculated using the principal balance and accumulated interest from previous payment periods. Savings accounts generally compound daily, monthly, quarterly, or annually.

When you are looking for a savings account with the best return rate, pay attention to the Annual Percentage Yield (APY). The APY can help you determine how much you will earn in interest annually because it relies on the interest rate and how often interest compounds.

You may ask, “Do savings account interest rates change over time?” The answer is yes. Most savings accounts have a variable rate, which can change frequently. If the economy is thriving and the Federal Reserve raises interest rates, you may benefit from a higher APY. But if the economy weakens and the Federal Reserve lowers rates, you may earn less interest from a lower APY.

Benefits of Savings Accounts

A checking account is beneficial for consumers, but a savings account is just as essential. Savings accounts offer a lot of financial advantages. If you have not yet opened a savings account, learn about some of the benefits below.

Ability To Earn Interest

Generally, most checking accounts do not earn interest. While you are able to organize your finances and keep your money secure, checking accounts are better suited for short-term deposits and expenses. In contrast, a savings account allows you to earn money from your own money!

Suppose you make a $1,000 deposit into a savings account with a 3.75% APY. If you do not make withdrawals for 12 months, your balance will grow to $1,038.15. You don’t have to do anything to earn interest payments with a savings account. And the more money you save, the more you receive in return.

Save Money for Short or Long-Term Financial Goals

As the proverb goes, “Out of sight, out of mind.” While you can keep your money in your checking account, you may feel more inclined to spend it. But if you keep your extra funds in a separate savings account, you may forget about it and allow yourself time to grow a sizable nest egg.

Ideally, you should only have enough money in your bank account to cover monthly bills and expenses. Any additional income should go into a savings account to earn interest payments and help you achieve short and long-term financial goals, such as:

  • Saving up for a tropical vacation.
  • Becoming a homeowner.
  • Getting cosmetic dental procedures.
  • Repaying student loan debt.
  • Covering the cost of a down payment for a new car.

Keep Cash Safe

Keeping your money in a savings account is one of the best ways to secure your finances. While a person may be content with keeping cash in their home, they may lose that money in case of a fire, robbery, flood, or other unexpected disaster. But having money in a federally insured bank or credit union protects you.

All of the best savings accounts offer Federal Deposit Insurance Corporation (FDIC) deposit insurance. This type of insurance automatically protects depositors in case of bank failure or default. Deposits up to $250,000 are insured per depositor. This insurance amount includes accrued interest. For example, if you have a Discover online savings account with a principal balance of $190,000 and $2,000 in accrued interest, then $192,000 would be insured and protected.

Assistance for Financial Emergencies

A savings account is necessary for unexpected expenses. No matter how responsible you are with money, there will likely come a day when you require a large lump sum for an unforeseen expense. Your car might break down and need a new suspension, or you may have to pay for medical treatment. Having money readily available in a savings account can help you avoid taking out loans and becoming a debtor.

Disadvantages of Savings Accounts

While you can expect to receive a lot of benefits when you open a savings account, there are also disadvantages to consider. Knowing the cons can help you find the best financial institution for your unique saving goals.


Savings accounts typically charge fees, just like other financial accounts. But some traditional and online banks charge more fees than others. The best way to avoid paying excess fees is to know which type of fees your bank charges.

  • Monthly Maintenance Fee — Some banks charge monthly maintenance fees, also known as monthly service fees, for having an account. However, some banks will waive the monthly maintenance fee if you make qualifying deposits or maintain a minimum balance.
  • Excess Withdrawal Fee — When savings account holders withdraw over the federal limit (six free withdrawals), the bank will charge an excess withdrawal fee.
  • Inactivity Fee — An inactivity fee, also known as a dormancy fee, is a charge when there is a prolonged period of no activity on the account.
  • Paper Statement Fee — A paper statement fee is a charge for mailing paper bank statements to your home. To avoid this type of fee, you can opt for paperless statements.
  • Wire Transfer Fee — A wire transfer is a quick electronic transfer. However, you will likely have to pay a wire transfer fee for receiving or sending wire transfers.

Low Returns

Some savings accounts have meager returns, and you may be missing out on extra interest payments by sticking with a bank that has a low-interest rate. For example, a traditional savings account generally has a lower interest rate than a high-yield savings account.

Suppose you have $1,000 in a traditional savings account with a 0.25% APY that compounds monthly. Within a year, you can expect to earn $2.50. In contrast, keeping your money in a high-yield account with a 4% APY can help you earn $40! It’s always a good idea to look for the highest rate possible so you can make the most of your money.

Types of Savings Accounts

There are different options available when you want to open a savings account. The best type of account for you depends on several factors, such as whether you need constant access to your funds and your desired return rate. But remember that you may have to meet specific eligibility requirements for certain accounts.

Traditional Savings Account

A traditional savings account is a standard account from a bank or credit union. The minimum deposit amount required to open an account is typically small, although you may find a financial institution that has no minimum requirements. The interest rate for traditional savings accounts is generally very low, and you may have to maintain a specific monthly balance. Most traditional accounts are FDIC-insured, which means up to $250,000 is federally insured.

High-Yield Savings Account

High-yield savings accounts are savings accounts with high annual percentage yields. Consumers can expect to get a rate higher than the national average. Many local financial institutions offer high-yield accounts, but you may find more online options. High-yield accounts are ideal for meeting short or long-term financial goals. Depending on the bank or credit union you work with, you may have to provide a high initial deposit. In addition, you may only be able to withdraw money from the account a specific number of times.

Certificate of Deposit (CD) Account

A certificate of deposit (CD) account is a unique type of savings account for people that can afford to temporarily surrender their money for an extended period. CD accounts hold deposits for a specific amount of time, such as a few months or several years, in exchange for a higher return on investment. Unlike traditional or high-yield savings accounts, the interest rate is fixed and does not change throughout the CD term.

Suppose the APY for a high-yield account is 3%, while the APY for a CD account is 5%. Both types of accounts get compounded monthly, and you decide to deposit $5,000 in both accounts for one year. You will receive approximately $152 in interest payments through the high-yield account. But with a CD account, you can expect to receive approximately $256! That’s a difference of $104. You can make money without doing anything at all.

While it may be possible to withdraw your money earlier than your schedule allows, you will have to pay an early withdrawal penalty fee. The cost of this fee is typically a high percentage of your total balance. Ideally, it’s better to avoid dipping into your CD balance. If you don’t think you can avoid using the money kept in a CD account, you may be better off with a different savings account.

Money Market Accounts

A money market account is similar to a checking and savings account. Consumers can earn a higher APY than a traditional savings account while still being able to write checks and withdraw from the account. A money market account is best for people that have short or long-term financial goals and want continuous access to their savings.

Banks, credit unions, and online financial institutions offer money market accounts. If you are looking to open this type of account, ask about minimum deposit requirements, monthly fees, and withdrawal limits. It’s also in your best interest to use a money market account that is federally insured.

Cash Management Account

A cash management account pays the account holder interest. However, it is a type of nonbank account. A nonbank account is typically only offered by investment advisory firms and brokerages, not banks. Cash management accounts are best for consumers that have investment accounts and want to link their savings for easy and fast transfers between accounts.

A cash management account is itself a type of investment account but far less risky than other types of investments, such as stocks. Keep in mind there may be fees associated with the account, depending on the account provider you work with.

How To Open a Savings Account

If you do not yet have a savings account, you may be curious as to how to start the application process. Opening a savings account is a relatively simple and straightforward process. Now that you know the different types of savings accounts available, you can start the process of opening an account.

Step 1: Finding a Bank or Financial Provider

The first step is to find a bank or financial institution to work with. When comparing your options, consider how much money you have available to deposit immediately. Some financial institutions have initial deposit requirements and monthly fees, while some do not. In addition, you may have to comply with certain rules, such as maintaining a specific balance.

Consider your financial situation and how much you intend to deposit and keep in your savings account. Financial experts advise consumers to only open a savings account with a financial institution that provides FDIC insurance so their money has a safety net.

Most financial institutions allow consumers to apply for a savings account online, so don’t think you have to find a decent time to travel to a brick-and-mortar. Some financial institutions are solely online, which means there are no local branches you can visit in person. However, these options still provide customer service support via phone, email, or online chat.

Step 2: Provide Your Documents and Information

The exact information you need to provide in order to open a savings account depends on the financial institution, as some options may require more information than others. For example, you may have to provide your birth certificate in addition to a Social Security Number (SSN) to open a savings account with certain banks or credit unions.

Generally, you can expect to provide the following documents and information:

  • A government-issued photo ID (driver’s license or state ID).
  • A Social Security Number or Individual Taxpayer Identification Number.
  • Proof of address (utility bill, credit card statement, etc.).
  • Checking account details (account and routing numbers).
  • Contact details (phone number or email address).

Step 3: Make an Initial Deposit

When you apply to open a savings account, you will be asked to make an initial deposit. If the bank or credit union requires an initial deposit, then you must initiate a transfer in order to open a savings account with them.

If you apply online, you can submit the bank details for your existing checking account. You will need to provide your bank name, routing number, and account number. It’s crucial to double-check your checking account information before proceeding with the process. If you apply for a savings account in person, you may be able to make an initial deposit using cash or a personal check.

If the financial institution does not have an upfront deposit requirement, you can skip this step and make deposits later. The amount of time it takes for your first deposit to show up in your account varies, but you can start earning interest the moment your balance updates!

Step 4: Start Making Regular Deposits

It’s essential to make regular deposits into your savings account to grow your savings and reach your financial goals. One of the best ways to increase your savings is to set up automatic deposits. Most financial institutions allow consumers to set up automatic deposits that deduct a specific amount from their checking account to their savings.

Suppose you sign up to have $100 automatically added biweekly to your savings account the day after your payday. If you receive 26 paychecks within one calendar year and do not withdraw any money from your account, you will end up with a $2,600 balance! You can use this money to tide you over in case of an unforeseen emergency.

How Much Should I Keep In My Savings Account?

There is no correct amount of money you should have in a savings account. However, financial experts agree that you should have at least three to six months’ worth of expenses saved up. If you typically spend $2,000 every month, then your savings balance should be at least $6,000 to $12,000. In the event you lose your job, you have enough saved up to cover the cost of living while you find another place of employment.

In the event of an unexpected emergency, it’s also best to have excess money saved up. Suppose you get in a minor car accident and need two new airbags. If the average price of a new airbag is $500, then you will need at least $1,000 in a savings account. If you have at least this much money in your emergency fund, then you can avoid taking out a personal loan! Although personal loans are useful financial products, you will end up paying interest fees to borrow emergency money. The total cost of interest can be significant if you borrow a lot of money or get stuck with a high rate.

And if you already have debt in your name, taking out one more loan may negatively affect your credit score. Submitting a loan application will deduct a few points from your credit score. And if your credit utilization ratio gets too high, you may find it challenging to maintain a good credit score. Credit scores are important, and having a strong score can help you gain purchasing power.

How Do You Close a Savings Account?

Suppose you find a bank that offers high-yield accounts with higher APYs, and you want to close your traditional savings account. In order to officially close your current account, you must first ensure there are no pending transactions and that you transfer all of your savings to the new account. Most financial institutions allow consumers to cancel the account online through their account, but you can also call customer service and request a closure.

The good news is that unlike closing a credit account, there is no negative effect on your credit score when you close a savings account. However, it’s important to update your payment information. If any bill payments are automatically deducted from your savings account, it’s crucial to update payment information before closure to avoid returned payments and late fees.

But before you attempt to close your account, carefully read through the terms and conditions. Some financial institutions charge fees if you close the account too soon after the account opening date, such as within the first 30 days.

The Bottom Line: Savings Accounts

A savings account can help consumers organize their finances and save for short or long terms goals. Many people find savings accounts useful because keeping their extra income separate from their checking account helps them avoid overspending. When money is out of sight, it is out of mind, and you may find it easier to let your savings grow. In addition, a savings account allows you to make money off your existing funds. Start looking for a financial institution to work with today and start reaping the rewards!

Understanding the Differences Between Simple vs. Compound Interest│Microsoft
Deposit Insurance FAQs│FDIC
Types of Savings Accounts│U.S. News and World Report

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