What is a Savings Account?: A Quick 101 Guide

1. What is a Savings Account and Why Do I Need One?

A savings account is a type of bank account that is designed to help you store and grow your money.

It offers some ways to access the money, but a savings account isn't meant to be used for frequent transactions -- that's reserved for checking accounts.

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. The interest earned isn’t a fortune, but it's definitely better than nothing.

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 have ready for an unexpected expense. 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 (like you would with a certificate of deposit) 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?

Savings accounts can come in a few forms:

Traditional saving 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. Earn Interest

A savings account is more than just a bank account to hold and accumulate your money.

Most savings accounts allow you to earn interest on your deposit balance.

So, a savings account can help you grow your savings.

Obviously:

A higher interest rate means that your savings will increase much faster.

The highest savings rates are typically found at online banks because these financial institutions don't have to pay for the expenses of operating physical locations.

Generally, standard savings accounts from banks that run branches and ATMs are unable to provide very high interest rates.

4. FDIC Insurance

Savings accounts at FDIC-insured financial institutions are eligible for deposit protection.

The FDIC insures total deposits of $250,000 per account ownership type per bank.

If the bank goes out of business, customers are guaranteed to receive up to the covered limit.

An account ownership type can be one of the following:

  • Individual
  • Joint
  • Business
  • Trust

So, if you have $250,000 in an individual savings account and $250,000 in an individual checking account at the same bank, only $250,000 of the $500,000 is insured.

However, if the additional $250,000 was held in a joint savings account at the same bank, the entire $500,000 is insured.

5. Common Fees

Depending on the bank, savings accounts can come with a list of fees.

The three most relevant fees for savings accounts are:

  • Monthly service fees
  • Excess withdrawal fees
  • ATM withdrawal fees

Monthly service fees

A savings account may come with a monthly fee for account maintenance.

Usually, you can waive the fee by meeting a certain requirement, such as maintaining a minimum balance for the month or transferring a specific amount of money into the account.

As a saver, you'd want to make sure that you're able to avoid any monthly account fees because they are making you lose money -- opposite of what you want from a savings account.

Free savings accounts are commonly found at online banks, community banks, and credit unions.

Excess withdrawal fees

By law, a customer is not allowed to make more than six (6) withdrawals per month from a savings account.

Banks may impose an excess withdrawal fee per withdrawal after you've made the first six withdrawals for the month.

Furthermore:

If the bank feels that you're constantly making excess withdrawals, the bank can convert your savings account into a checking account.

ATM fees

Some savings accounts will provide customers with an ATM card for quick and easy access to cash, which is useful when branches are closed.

Typically, banks don't charge any fee when customers make withdrawals at an ATM owned by the bank.

However:

If you use an ATM not owned by the bank, you're likely to get charged an out-of-network ATM fee.

To make matters worse, there could be a separate surcharge from the owner of that out-of-network ATM.

The total cost to withdraw cash from an out-of-network ATM can get quite expensive.

6. How to Choose a Savings Account

Online Accounts 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.

Again, 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.

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