Maybe your piggy bank is overflowing, or the space beneath your mattress is filling up. Wherever you’ve been putting your money, you’re now interested in storing it more safely.
But if you’re new to saving with a brick-and-mortar or online bank, you could be stuck on a basic question: What is a savings account?
What is a savings account?
A savings account is a financial tool provided by a bank that allows you to keep your money safe. In fact, the Federal Deposit Insurance Corporation insures accounts for up to $250,000 at reputable banks.
There are all sorts of savings accounts. But at its core, a savings account can allow you to grow your money. Your account balance can earn interest over time.
A savings account can also help you save for a short-term goal, such as building an emergency fund.
Types of savings accounts
All kinds of banks are competing for your money. Ultimately, a bank might entice you to open different types of savings accounts with different perks.
For instance, a bank often advertises an account’s annual percentage yield. That’s the amount of interest that can accrue on your deposits.
APY also represents one of the main differences between savings accounts and checking accounts.
Typically, checking accounts are for storing your money temporarily, and they might not allow you to earn interest. Instead of awarding you an APY for your checking account, a bank will hand you a debit card that can be used for purchases.
Savings accounts come with an ATM card. They allow you to withdraw cash from a bank teller or an ATM.
Beyond basic savings accounts, there are two other types of savings accounts that could allow you to score more interest.
- Certificate of deposit (CD): You lock in an APY by depositing a large amount of money for a fixed period, usually three to five years. Withdrawing your money early would result in a penalty.
- Money market (MM): You deposit a large amount of money to earn a higher APY and must maintain a minimum balance to avoid fees. You might receive the benefit of a debit card or checkbook.
How to choose a savings account
There are different factors you might consider when choosing a savings account.
Depending on your priorities, they could include the number of nearby ATMs or account fees. More likely, you’ll want to earn as high an APY as possible.
A general rule of thumb: The less access you have to your money, the higher the APY you’ll be awarded.
Many top online banks with high-yield accounts don’t offer access to ATMs, for example, but do offer 1.00% or higher in interest. A national bank, on the other hand, might have ATMs on every corner of the country but stick you with an APY as low as 0.01%.
You don’t need to know exactly how savings account interest works to know that 1.00% helps your money grow a lot faster than 0.01%. But our savings calculator below will drive the point home for you.
If you have a lump sum of money and don’t need to access it routinely, you might pick from CD or MM accounts that have high APYs.
Picking an account type will help you choose a bank. Your options include:
- National banks: Aside from having access to more ATMs, you could manage all your finances under one roof.
- Local banks: What you might lose in accessibility, you could gain in a higher APY.
- Online banks: With lower overhead costs, an online bank should offer higher APYs and better online banking tools.
- Credit union: These nonprofit member-owned banks frequently beat national banks’ APYs.
How to open a savings account
Opening a savings account is the easy part. Instead of walking into your nearest branch, you could complete the whole process online or over the phone.
If you’re opening your first account, however, you might benefit from hands-on service inside of a bank. Then you can ask the right questions before opening a savings account.
Regarding what you need to open a bank account, have your Social Security and state ID numbers handy. You might also want to have your employer’s information ready if you plan on setting up a direct deposit from your paycheck to the new account.
Your new bank might require an initial deposit when you’re setting up a new savings account. It could be as little as $1 for basic accounts.
You might also consider opening a checking account with the same bank. This way, you’ll have one account for saving and one account for spending.
At many banks, you can set up overdraft protection or automatic transfers between the two accounts. When your checking account hits zero, your savings account can replenish it.
Keep in mind that the Federal Reserve requires banks to allow six automatic savings account transfers per month before it charges you fees.
Start saving up today
Now that you feel confident enough answering the question, “What is a savings account?” perhaps you might be asking, “Is putting money in a savings account a waste?”
There are higher-risk ways of saving your money that could earn you more, such as through investment accounts. You might consider the beginner’s guide to investing to learn about those options.
But a savings account is a safe way to keep and grow your money in the short term. Unlike with an unwise investment, a savings account will never decrease in value on its own.
If you open a savings account, you’ll at least see modest returns, which is more than you can say about stuffing money in your piggy bank or under your mattress.
Need a student loan?Here are our top student loan lenders of 2018!
|1 Important Disclosures for CollegeAve.
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or Nationwide Bank, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
Information advertised valid as of 11/1/2018. Variable interest rates may increase after consummation.
2 Important Disclosures for Discover.
3 Important Disclosures for Ascent.
Before taking out private student loans, you should explore and compare all financial aid alternatives, including grants, scholarships, and federal student loans and consider your future monthly payments and income. Applying with a cosigner may improve your chance of getting approved and could help you qualify for a lower interest rate. Ascent Student Loans may be funded by Richland State Bank (RSB). Ascent Student Loan products are subject to credit qualification, completion of a loan application, verification of application information and certification of loan amount by a participating school. Loan products may not be available in certain jurisdictions, and certain restrictions, limitations; and terms and conditions may apply. Ascent is a federally registered trademark of Turnstile Capital Management (TCM) and may be used by RSB under limited license. Richland State Bank is a federally registered service mark of Richland State Bank.
* Application times vary depending on the applicants ability to supply the necessary information for submission.
* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers.
4 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
5 Important Disclosures for PNC.
PNC Bank is one of the nation’s largest education loan providers. For over 40 years, PNC has been committed to helping students and their families make possible the adventure of college.
6 Important Disclosures for SunTrust.
Before applying for a private student loan, SunTrust recommends comparing all financial aid alternatives including grants, scholarships, and both federal and private student loans. To view and compare the available features of SunTrust private student loans, visit https://www.suntrust.com/loans/student-loans/private.
Certain restrictions and limitations may apply. SunTrust Bank reserves the right to change or discontinue this loan program without notice. Availability of all loan programs is subject to approval under the SunTrust credit policy and other criteria and may not be available in certain jurisdictions.
SunTrust Bank, Member FDIC. ©2018 SunTrust Banks, Inc. SUNTRUST, the SunTrust logo and Custom Choice Loan are trademarks of SunTrust Banks, Inc. All rights reserved.
7 Important Disclosures for LendKey.
Additional terms and conditions apply. For more details see LendKey
8 Important Disclosures for CommonBond.
A government loan is made according to rules set by the U.S. Department of Education. Government loans have fixed interest rates, meaning that the interest rate on a government loan will never go up or down.
Government loans also permit borrowers in financial trouble to use certain options, such as income-based repayment, which may help some borrowers. Depending on the type of loan that you have, the government may discharge your loan if you die or become permanently disabled.
Depending on what type of government loan that you have, you may be eligible for loan forgiveness in exchange for performing certain types of public service. If you are an active-duty service member and you obtained your government loan before you were called to active duty, you are entitled to interest rate and repayment benefits for your loan.
A private student loan is not a government loan and is not regulated by the Department of Education. A private student loan is instead regulated like other consumer loans under both state and federal law and by the terms of the promissory note with your lender.
If your private student loan has a fixed interest rate, then that rate will never go up or down. If your private student loan has a variable interest rate, then that rate will vary depending on an index rate disclosed in your application. If the interest rate on the new private student loan is less than the interest rate on your government loans, your payments will be less if you refinance.
If you don’t pay a private student loan as agreed, the lender can refer your loan to a collection agency or sue you for the unpaid amount.
Remember also that like government loans, most private loans cannot be discharged if you file bankruptcy unless you can demonstrate that repayment of the loan would cause you an undue hardship. In most bankruptcy courts, proving undue hardship is very difficult for most borrowers.
9 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|3.94% – 12.78%1||Undergraduate, Graduate, and Parents|
|4.04% – 13.04%3||Undergraduate and Graduate|
|4.34% – 12.99%2||Undergraduate and Graduate|
|4.25% – 11.10%*,4||Undergraduate and Graduate|
|5.03% – 11.23%5||Undergraduate and Graduate|
|4.12% – 13.13%6||Undergraduate and Graduate|
|4.92% – 10.01%7||Undergraduate and Graduate|
|3.72% – 9.68%8||Undergraduate, Graduate, and Parents|
|4.26% – 12.13%9||Undergraduate, Graduate, and Parents|