Banks and credit unions offer different types of accounts for varying consumer needs. Checking accounts are ideal for paying bills, while money market accounts earn interest on investments. Savings accounts are a popular service that financial institutions offer customers seeking an easily accessible option that allows them to separate their everyday spending from the money they use for large purchases or special events.
What is a Savings Account?
Savings accounts are deposit accounts where you keep funds you don’t intend to use in the immediate future. They differ from your checking account, which is more suitable for everyday purchases and debit card withdrawals.
A savings account allows you to save and earn money for specific goals you have in mind. These goals can include putting money aside for purchasing a home or creating an emergency fund.
How Does a Savings Account Work?
Savings accounts are easy to open and use. You’ll make an initial deposit when opening your account and can make regular or one-time deposits in the future. Banks pay interest on your savings account balance, a feature that is unavailable for checking accounts.
There are several methods you can use to add money to your savings account:
- Cash or check deposits at your brick-and-mortar bank location.
- Deposit cash or checks at the ATM for convenience.
- Automated clearing house (ACH) transfers from a linked account. ACH transfers are bank-to-bank fund transfers that facilitate transactions between banks and credit unions.
- Direct deposit or via wire transfer from other banks
- Mobile check deposits
What Are the Types of Savings Accounts?
There are different types of savings accounts, and the best choice for you helps you meet your financial goals.
Standard Savings Account
The most common type of savings account is the standard savings account offered by conventional banks and credit unions. The APY you earn here is usually lower than other savings accounts, and you may incur monthly maintenance or minimum balance fees.
High-Yield Savings Account
High-yield savings accounts offer customers a higher average APY than standard savings accounts. Although conventional banks and credit unions may offer high-yield savings accounts, you are more likely to find them at online banks. Online banks can offer higher yields due to lower overhead costs and charge fewer fees.
Student Savings Account
Student savings accounts are for children and students instead of adults. This type of account helps children adopt proper savings habits while older students can save money for their college education. Student savings accounts are more common at conventional banks and credit unions than online banks.
Specialized Savings Account
Specialized savings accounts allow you to set a specific purpose for your account. This type of savings account is perfect for saving money for a wedding or a down payment on a boat. If you choose to open a Christmas savings account, you may only be allowed to make a withdrawal just before the holiday season.
Reasons to Open a Savings Account
While your checking account and credit cards allow you to transact daily, opening an account specifically for accumulating funds is a valuable financial tool.
Store Your Savings
Saving money gives you a greater sense of security. Although money can accumulate in your checking account, you could be prone to spending the extra cash on impulse purchases. A savings account helps you build an emergency fund by making it less likely to spend extra money on a whim.
Federal regulation limits withdrawals from your savings account to six per month. This means you’ll face less risk of derailing your financial goals.
Savings Automation
An automatic savings plan schedules your deposits, so a portion of your paycheck periodically goes into your savings account. This removes the need to make manual deposits each time you’re paid.
To maximize the effectiveness of automated savings, make sure to adjust your savings to match any raises or salary increases you receive. This way, your saving efforts will adapt to your earnings.
Generate Interest and Savings
Savings accounts can compound annually, quarterly, monthly, or even daily. The more often your account compounds, the faster your account balance will grow. Compounding interest can result in a noticeable increase in savings and helps improve your financial situation.
Keep in mind that none of the activity from your savings account impacts your credit score. On the other hand, you can use your savings account to collect money to pay off a loan early or pay for products or services without using a credit card.
Paying off loans and other interest-accumulating debt will save you money in the long run and allow you to divert more income to your savings account.
Ability to Link With Other Accounts
Linking other accounts to your savings can facilitate reaching your financial goals with less effort. For example, you can set up automatic transfers from your checking account into your savings.
Alternatively, you can draw funds from your savings into your checking to cover overextending on your month’s expenses. Setting up transfers between accounts is accessible via mobile banking, and it is possible around the clock.
Plan for Children’s Future
Opening a savings account for your child’s future is a great way to build their college fund or set cash aside to use when they’re older. You’re less likely to dip into the account’s funds if it is labeled “College Fund.” You can use savings automation to grow the account with small deposits that can add up over a decade or more.
Savings Accounts Are FDIC-Insured
The Federal Deposit Insurance Corporation (FDIC) is a government agency that insures bank deposits up to $250,000. Most financial institutions are members of FDIC and offer coverage for their accounts. Check with your bank to verify that the savings account you intend to open falls under the government’s protection.
How a Savings Account Differs from a CD
A certificate of deposit or CD is a banking instrument that allows you to reach your short and long-term savings goals. A CD is similar to a savings account but often comes with a slightly higher APY while requiring you to refrain from making withdrawals during a predetermined period. Accessing your CD triggers penalties that can eat away at your savings.
CDs are viable banking options for consumers who can afford to put funds aside that they are confident they will not need to access in the immediate future. On the other hand, savings accounts allow six withdrawals per month without compromising your earnings.
Opening Your Savings Account
After considering the different types of savings accounts and arriving at the one that suits your needs, contact a bank that meets your criteria. Do a competitive analysis regarding interest rates, services, deposit insurance, and convenience. You may want to include credit unions and online banks in your list of candidates.
A brick-and-mortar bank may require a minimum deposit ranging from a few hundred to several thousand dollars, while online savings accounts allow you to open an account with less. The initial deposit and minimum account balance requirements vary between banking institutions.
Learn More About Bank Accounts
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Disclaimer: All content on this site is information of a general nature and does not address the circumstances of any particular entity or individual, nor is the information a substitute for professional financial advice and services.
