When the average person opens a bank account, they often don’t just open one—they open two: a checking account and savings account. A checking account is usually reserved for routine money tasks, like depositing paychecks and drawing from to pay bills, while a savings account is where people usually hold money for short-term money goals.
Savers can deposit money anytime into savings accounts, and they’ll usually benefit from federal deposit insurance and may even earn a modest amount of interest on their deposits. Find out how these accounts work and how to find the right one for you.
What is a savings account?
A savings account is a deposit account that’s designed to hold money a person needs for a later date. But because these accounts are liquid, a savings account holder can access their funds anytime. Most savings accounts are government-insured, which means the money is safe against bank failure, and may even pay interest on deposits. All of these factors make savings accounts a place to keep money for short-term goals, like an emergency fund or a down payment on a house.
When someone is ready to open a savings account, they’ll have options at most credit unions, banks, and online financial institutions. While the saver can deposit money into these accounts anytime, their financial institution might restrict how often they can make withdrawals. Some impose a limit of six withdrawals per month, while others may allow more withdrawals but charge fees for them. (The withdrawal limit can be beneficial if someone needs an extra reason to leave their money untouched.)
Savings accounts are different from checking accounts, which are designed more for day-to-day use. Checking account holders can write checks, make cash deposits, and withdraw money at an ATM or a store using a debit card. Brokerage accounts also differ from savings accounts because they provide a way to buy and sell securities such as stocks, bonds, and mutual funds.
Why open a savings account?
There are several reasons one might consider opening a savings account.
- They’re insured. If a bank is insured by the Federal Deposit Insurance Corp., or FDIC, then its savings accounts are insured for up to $250,000 in the event of a bank failure. The National Credit Union Administration, or NCUA, provides similar insurance for deposit accounts at credit unions.
- They’re liquid. Savings accounts provide more liquidity than some products, like retirement accounts, real estate, and individual stocks and bonds. Account holders can typically withdraw money from the savings account anytime, although they might pay a fee if they go over the six-withdrawal limit.
- They usually pay interest. Interest provides a consistent, passive return on the saver’s money.
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Different types of savings accounts
Generally, a savings account is any account that allows account holders to add funds, earn interest, and withdraw money with some limits. But they can be further classified by their interest rate structure and other features:
- Standard savings accounts. These are basic savings accounts usually offered at brick-and-mortar banks and credit unions. Account holders usually pay monthly maintenance fees, must maintain a minimum balance, and receive a lower annual percentage yield (APY).
- High-yield savings accounts. Usually available at online institutions, these offer an above-average APY with little or no account fees. However, account holders may need to meet certain conditions to receive these terms.
- Money market accounts. These combine features of checking and savings accounts. Account holders usually get above-average interest rates, can write checks, and can make withdrawals and purchases using a debit card.
There are also different ways to define who can use the savings account:
- Individual account. These are owned by a single person. No one else can use the account, with the exception of a power of attorney.
- Joint accounts with rights of survivorship. These are owned by two or more people. If one of the owners dies, the remaining funds are given to the living account holder(s). The government guarantee increases accordingly, so, for example, two account holders receive $500,000 of FDIC or NCUA insurance.
- Payable on death (POD). In this arrangement, a specified beneficiary receives the funds from a savings account when the owner dies.
- Uniform Transfers to Minors Act/Uniform Gifts to Minors Act (UTMA/UGMA). This provides a way for an adult to open a savings account for a minor without setting up a trust or paying taxes beyond a certain amount. The adult oversees the account until the child reaches age 18 or 21, depending on the state.
Choosing a savings account
When an individual wants to open a savings account, they can shop around at different banks, credit unions, and online institutions. Each account may have a different APY, fee structure, and terms and conditions. People typically focus on these savings account features:
- Annual percentage yield. APY shows how much interest the account earns each year. Savings accounts usually have a variable APY, which means it can change over time. A higher APY can help account holders earn more money, but they might have to follow certain terms to keep that rate.
- Minimum balance. Account holders may need to keep a certain amount of cash in the savings account to earn the published interest rate or avoid monthly fees.
- Initial deposit requirements. Individuals can usually open a savings account with as little as $25 to $100. In some cases, they won’t need an initial deposit at all.
- Monthly maintenance fees. Some financial institutions charge a monthly fee just for keeping a savings account open, which could wipe out any money earned on interest. But some institutions waive the fee if certain requirements are met.
- Easy withdrawals and deposits. For the ability to transfer or withdraw money easily, individuals want features such as a wide ATM network, the ability to use a debit card, and digital tools like payments app Zelle. They also check how often they can make withdrawals before a penalty kicks in.
- Deposit insurance. Depending on where they keep their savings, individuals check whether the account is FDIC-insured or NCUA-insured. Deposit insurance guarantees they’ll get their money in the event of a bank failure, as long as they’re within the insurance limits and guidelines.
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