A savings account is an account at a bank, credit union or other financial institution that earns interest. Savings accounts are typically used to achieve short-term financial goals, such as making a down payment on a home or to build an emergency fund.
How Savings Accounts Work
Savings accounts don’t work the same way at every financial institution, but the process usually goes something like this:
- Figure out the financial goals you want to reach with a savings account and decide where you want to park your money.
- Open the account online, at a branch or over the phone.
- Deposit money to fund the account. In some cases, a minimum deposit may be required.
- Earn interest on the money you deposit and on the interest you receive. Money in your account is typically insured up to a certain amount.
- To make the most of your account, set up automatic deposits from a checking account or your electronically deposited paycheck.
- Deposit, withdraw or transfer money when you need to. You may be able to do this online, at a bank branch, at an ATM or with a mobile app, depending on the type of transaction.
Advantages of Savings Accounts
Among the advantages of savings accounts:
- Savings accounts are easy to open.
- Money in a savings account is easily accessible.
- Savings accounts earn compound interest, meaning you earn interest on the interest that you receive.
- Deposits in savings accounts generally are insured up to a certain dollar amount. Federal insurance from the Federal Deposit Insurance Corp. and the National Credit Union Administration covers deposits in savings accounts if a financial institution is FDIC- or NCUA-insured.
- Some savings accounts include an automated feature for paying bills.
Disadvantages of Savings Accounts
Among the disadvantages of savings accounts:
- Interest rates are variable, not fixed.
- Inflation might erode the value of your savings.
- Some financial institutions require a minimum balance to earn the highest interest rate.
- Some accounts might charge fees.
How to Maximize Earnings With a Savings Account
To maximize earnings with a savings account, shop around to see which financial institutions are paying the highest interest rates and offering favorable terms, such as no fees and no requirement for a minimum balance. You might find that an online-only bank or credit union, for instance, pays a higher annual percentage yield than a traditional bank.
If you’re hunting for the highest interest rate, a high-yield savings account might be your best bet. A high-yield savings account delivers a higher average APY than a traditional savings account.
In addition, don’t overlook other types of savings accounts, such as certificates of deposit and money market accounts. You might come across higher interest rates for these accounts than what a traditional or high-yield savings account offers.
Types of Savings Accounts
Traditional savings account: This is the most basic type of savings account.
High-yield savings account: This account offers a higher APY than a traditional savings account.
Certificate of deposit. A CD lets you deposit money for a certain period of time, such as three months or three years, and earn a fixed interest rate on that money.
Money market account. A money market account is a hybrid between a checking account and a savings account. Unlike most other savings accounts, a money market account allows you to write checks.
Cash management account. A cash management account is a nonbank account typically available from an investment brokerage or investment advisory firm.
Specialty savings account. Specialty savings accounts are designed to set aside money for specific needs, such as paying for holiday gifts, covering health care expenses or teaching someone under 18 about the importance of saving money.
How to Open a Savings Account
- Determine the purpose of the savings account. For instance, are you saving money for a vacation or emergency situations?
- Shop for the best interest rates. Check the rates at different institutions to see where you can earn the highest APY.
- Consider fees and requirements. Find out if you’ll have to pay a monthly maintenance fee. Will you need to keep a minimum amount in the account to earn the most attractive interest rate?
- Explore the banking features available. These could include debit cards and ATM networks.
- Choose the financial institution where you want to open the account. You may be able to open the account online, in person or over the phone at a traditional bank, credit union or online-only bank.
- Start the application process. Depending on the bank, you can likely do this online, on the phone or in person.
- Provide personal information. This may include your Social Security number, date of birth and current home address.
- Prove your identity. Be prepared to provide a government-issued ID, such as a driver’s license or passport.
- Fund the account. After your application has been approved, determine if you will need to make a minimum opening deposit.
How Much to Keep in a Savings Account
How much money you keep in a savings account depends on your financial situation and your reason for opening the account.
For example, if you’re setting aside money for emergencies, experts generally recommend putting away enough money to cover three to six months’ worth of everyday expenses. But if you’re saving up to pay for a wedding, you might set a target of, say, $30,000. That was the average cost of a wedding in 2022, according to wedding website The Knot.
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