Savings Account Basics
Savings accounts are among the best ways to build wealth. Your deposits, large or small, can help you save for a home, a major purchase – or a rainy day. Pay attention to interest rates (you want the highest) and fees (you want the lowest). Also look for how often you can withdraw funds.
1. What is a Savings Account and Why Do I Need One?
A savings account is a type of bank account that gives you easy access to your money. It’s a lot like a checking account but there are some key differences. One of the main savings account benefits is that these accounts pay a higher interest rate than a checking account. While you might not earn any interest on your checking account, the savings account interest rate will depend on what type of bank you have. This isn’t a fortune, but it's definitely better than nothing. Keep in mind, online banks offer higher interest rates than national banks.
In exchange, there are more restrictions to how often you can take money out of your savings account. The bank might limit your monthly withdrawals and you might need to keep a larger monthly balance in your savings account.
Importance of a savings account
A savings account is a great place to put money you don’t need every day but might need in the near future. It’s ideal for your emergency fund, which is money you’re supposed to be stashing away on a regular basis. After all, you never know when you’ll have a medical bill, car repair or other emergency happen. The savings account is a good choice for this money because you won’t lock up your cash and will earn a decent savings account interest rate.
Ideally, you should have enough money in your savings account to cover three to six months of expenses. This is enough to cover most expenses and can keep you going if you lose your job. If you don’t have this much yet, try saving a bit every month. Look at your monthly budget and set a goal for how much you can add to your emergency fund. You can set up an automatic transfer from your checking account each month to build up your savings account funds.
2. What Types of Savings Accounts Are There?
Traditional bank accounts
Most banks offer savings accounts. Setting up a savings account at your bank can be convenient because you can link it to your regular checking account. You can also visit the bank and get help in person. The disadvantage of traditional savings accounts is that they pay a low interest rate. Also, some banks require that you keep a minimum balance in your account or they charge you a fee.
Banks also offer high yield savings accounts. These accounts pay a higher interest rate than a regular savings account but they also typically require a larger minimum deposit, have more restrictions on transactions, and/or charge more fees.
Online savings accounts
You can also open a savings account with an online bank. These accounts usually pay a higher interest rate than what you’d get at a bank so you get a better return on your money. Online savings accounts are typically free, meaning, there’s no monthly maintenance fee to pay.
Money market accounts
With a money market savings account, the bank uses your deposit to invest in money market investments. These are very safe investments that are guaranteed by the government. With this approach, your savings earn a higher interest rate than what you’d get on a regular savings account. In exchange, these high-interest savings accounts usually require a larger deposit and might have more restrictions on how often you can take out money.
Kids savings accounts
Kids savings accounts are regular savings accounts at the bank, designed for children. When you set one of these accounts up for your children, you still have control over the account so you can limit when your kids make withdrawals or deposits.
3. How to Choose a Savings Account
Online vs. traditional
Your first decision should be to figure out whether you want to open an online savings account or open a savings account at a traditional bank. Online banks usually pay a higher interest rate while a traditional bank may give you better access to your money. If you already have a checking account at a bank, it can be convenient to open your savings account there as well. Make sure to consider your other options though because you might find a better savings account at another bank.
Choosing between banks
One way to rate banks is by looking at their interest rate. The bank with the best savings account rate will help you earn more interest on your savings. You should also consider how easy it is to get money out of your account. Some banks have more restrictions or take longer to process withdrawals for others.
If you often visit the ATM for cash, this is another important factor. For traditional banks, do they have enough ATMs in your area? For online banks, do they offer free ATM access anywhere? You should also consider the fees on different accounts. Ideally, your savings account would have as few fees as possible.
Finally, what kind of customer service does the bank provide? This is especially important for online banks because they might not have locations where you can speak to a representative in person. Make sure a company at least offers customer service by phone before you open a savings account online. After reviewing all these factors, you should be in good shape to pick a bank and open a savings account.