Savings Account Explained

What is a savings account?

A savings account is a place where you can store your money safely while earning interest. In contrast to investment accounts, they are federally insured, meaning that up to $250,000 of your funds would be protected if the bank failed.

Why do you need a savings account?

Using a savings account establishes a separation between your everyday spending money, which is held in your checking account, and money intended for a later occasion, such as an emergency fund or vacation fund.

Let’s examine how these accounts function, how much you should keep in your savings, where to find the best ones, and how they compare to other savings methods.

What you must understand about savings accounts?

Accounts for savings can help your money grow. The bank pays you a small amount of interest as a token of appreciation for allowing it to provide loans to other clients.

“A little interest” applies to the majority of accounts. Online banks, on the other hand, provide attractive annual percentage yields, or APYs, frequently in the vicinity of 2%, because they do not have to support costly brick-and-mortar locations. These accounts often have minimal minimum opening deposits and do not levy monthly maintenance fees.

The purpose of a savings account is to save money that is not needed immediately. Keeping this money in a separate account ensures that it will be available when you need it.

The accessibility of funds held in a savings account is less than that of funds held in a checking account. These accounts are fee-free and may even accrue interest.

Federal law prohibits more than six transfers or withdrawals per month from a savings account. Any further transfers — whether by cheque, debit card, or online — typically incur a fee. This six-per-month limit does not apply to withdrawals made at a teller window or an ATM.

These withdrawal limits could be a hidden blessing. Keeping this money in a separate savings account ensures that it will be available when you need it, such as in the event of an emergency or when it’s time to replace your vehicle.

How much to maintain in your savings?

It is prudent to have three to six months’ worth of living expenses in an emergency savings account. However, $500 saved can bail you out of many little financial jams. Start with $500 and expand from there.

After accumulating a buffer, consider the future. Ensure that you’re investing for retirement. Individual retirement accounts are a prudent next step for those who have accumulated sufficient assets. Keep in mind that these accounts may offer higher returns than a savings account, but they may also be riskier, depending on the investments you choose.

If you’re seeking for additional risk-free options, here are a few that are federally insured.

Options besides savings accounts

Banks and credit unions provide customers with additional options for savings:

Money market accounts, which often require a higher minimum amount and pay a somewhat greater interest rate in exchange, typically have a higher minimum balance requirement. The account may also have a debit card or the capacity to issue checks, although monthly transactions are limited to a few.

The word “certificate of deposit” (CD) refers to a financial instrument that retains funds for a specified time, ranging from a few months to several years. This account often offers the largest annual percentage yield; the longer the period, the greater the annual percentage yield. Open a certificate of deposit only with funds you won’t need soon, as early withdrawals incur a penalty.

Where to find the best savings accounts

If you choose a basic savings account, start your search with online banks and credit unions. These types of financial organizations have low fees, high-interest rates, and may even provide you with unique tools to manage your investments.

Once you’ve chosen a bank, you may open a savings account online or at a branch, where you’ll need to submit your Social Security number, phone number, and address, as well as a government-issued photo ID.