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.
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