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A savings account is a separate account to keep the money you don’t need daily. The right account will pay you interest and help you achieve your financial goals through interest compounding.
This guide will help you understand how a savings account works and why you should have one.
>> More: Best High Yield Savings Accounts
What is a Savings Account?
A savings account is a safe place to keep the money you don’t need for everyday expenses. Most banks pay interest on savings accounts, and if the bank is FDIC insured, your money is protected.
You can deposit and withdraw funds, but not at the same frequency you do with checking accounts.
How Do Savings Accounts Work?
Savings accounts store money you don’t need immediately. Banks pay interest on the funds and restrict you from withdrawing money more than six times a month.
Most checking accounts are free, and some come with a debit card for ease of use.
You can usually transfer funds electronically to your savings account and may even set up automatic transfers, so you don’t have to think about it.
What Are Savings Accounts Used For?
You don’t need a specific reason to have a savings account, but here are a few common reasons to have one.
- Emergency Funds: You should have 3 to 6 months of expenses saved for an emergency. Putting the money in a savings account (commonly referred to as an Emergency Fund) reduces the risk of spending the money, leaving you with nothing during an emergency.
- Saving for Large Purchases: If you’re saving for a large purchase, putting the money aside helps you see how much money you have and how close you are to your goal. It helps too that your money earns interest, helping you achieve your goal faster.
- Rainy Day Funds: We all have those rainy-day expenses we don’t budget for but have to pay. Car repairs, an unexpected medical bill, or house repair are good examples of rainy-day expenses. If you have the money set aside, you don’t have to worry about ruining your budget.
- Vacation Savings: Saving for vacation and seeing your progress can be exciting. It’s one step closer to your dream trip. Keep the money separate from your checking account and see how close you are to taking a well-deserved break.
How to Open a Savings Account
It’s easy to open a savings account since most everyone qualifies, but there are a few steps you should take before opening one.
Step 1: Research Your Options
You can open a savings account at just about any bank. You aren’t stuck with the bank where you have a checking account. Look around and see what options you have, including looking at interest rates and fees.
Step 2: Compare Interest Rates
Savings accounts should pay interest. It may not be much, but some banks pay more than others (especially online banks).
Look at your options and choose the bank with the highest APY if you can meet the balance requirements (if applicable).
Step 3: Compare Fees and Offerings
Savings accounts usually don’t have fees but always read the fine print. Also, see what other perks banks offer.
Some may offer a sign-up bonus or a matching contribution if you have a certain amount of money saved each month.
Step 4: Make Sure It is Mobile Friendly
If you’re a mobile banker, make sure the bank offers access to your savings account on their app. Most do but always check.
Step 5: Gather Necessary Documents
You’ll need proof of your identity, your Social Security number, and proof of your address.
Step 6: Apply Online
Most banks make it easy to apply for a savings account online. Read the fine print, know what documents they require, and apply in seconds for your new online bank account.
What Documents Are Needed to Open a Savings Account?
Most banks require these documents to open a savings account:
- A state-issued ID (driver’s license or State ID)
- Social Security card
- Current insurance, utility, or mortgage bill for proof of address
How to Add Funds to Your Saving Account
Once you have a savings account, it’s time to fund it. You’ll earn interest the moment you add funds. Here’s how:
- Deposit Checks: Deposit your check at a local branch in person or use the bank’s mobile deposit feature on its app.
- Cash Deposits: Deposit cash at your local branch or at a local ATM.
- Electronic Transfers: Transfer funds from any external account to your new savings account. It’s usually free from any bank or payment service like PayPal.
- Direct Deposits: Set up Direct Deposit with your employer. You can even have your paycheck sent to several bank accounts, so you save money and have enough to cover your monthly bills.
- Transfer from Checking Account: If your checking and savings account is at the same bank, set up automatic transfers from your checking account to savings each month to build up your savings.
Alternatives to Savings Accounts
- Online High-Yield Savings Account: Online high-yield savings accounts usually pay higher interest rates and have lower fees. They are harder to access too, which may mean you’ll leave the funds untouched longer.
- Certificate of Deposits (CDs): If you have time to let your money sit, CDs earn higher interest rates. Only tie up your money in a certificate of depositwith a length you can leave the money untouched. If you withdraw the funds too early, you’ll pay a penalty fee.
- Money Market Accounts: If you want easier access to your funds, a money market account is a cross between a checking and savings account. They usually require higher balances but pay higher interest rates. They also provide check-writing capabilities but limit your withdrawals to six per month.
- Bonds: Bondsare an investment in the government or a company’s debt. You loan them money for a specified period in exchange for a fixed rate of return. You must leave the money until maturity, though, or you won’t get the full return.
Can You Lose Money in a Savings Account?
You can only lose money in a savings account if you use a bank that’s not FDIC-insured. The FDIC insurance protects each depositor up to $250,000 in an account in each banking category.
Are Savings Accounts Insured?
Yes, as long as you choose an account at a bank with FDIC insurance.
Are Savings Accounts Safe?
Savings account are about as safe as you get when you put your money in a bank. You’ll earn a little interest, always have access to your funds, and won’t lose your money if the bank closes.
What is the Purpose of a Savings Account?
A savings account keeps your money separate, giving you a greater chance of saving money for a personal goal or emergency fund rather than spending it because it’s in your checking account.
Bottom Line: What Is a Savings Account?
Everyone should have at least one savings account. If you do nothing else, take the free account your bank may offer with your checking account.
Set up automatic transfers each month and save at least a little money to help you reach your financial goals.