What is a Savings Account & How Do They Work?

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A girl puts money in her piggy bank

What is a Savings Account?


If you’re serious about saving money, a savings account is a great way to do so. While it’s easy to assume that all bank accounts are created equal, a savings account offers benefits above and beyond a traditional checking account.

Most savings accounts are federally insured and you don’t have to worry about losing your money to theft or fraud. Most savings accounts also let you earn interest on your deposits, giving you added incentive to save and grow your money for the future. You can typically add money as often as you’d like, and interest will grow over time based on your account’s APY (Annual Percentage Yield), which is the amount of money you earn over one year.

Because savings accounts are meant to be used long term, some place restrictions on the number of times, or the amount of money, you can withdraw. This allows you to earn more interest and keeps your money separate from your everyday spending, helping you avoid the urge to dip into your savings.

Savings accounts range from traditional to high-yield, depending on the type of account and the financial institution. They include money market accounts, which offer competitive interest rates, and certificates of deposit (CDs) which typically return higher rates, as long as you agree to leave your money in your account for a set period of time. Savings accounts are a great way to earn interest and keep your money safe and separate from your other funds while saving for the future.

How does a Savings Account Work?

You can open a savings account at most financial institutions. You’ll want to research what kind of savings account is best for you (more on this later), which can help you determine where you’d like to open a savings account.

Once you open an account, you’ll be able to deposit money into that account. Some types of savings accounts require a minimum deposit and some don’t. You’ll want to read the terms and conditions of your account so that you know if a minimum deposit is required.

Your financial institution will then pay you interest on your balance. This is why savings accounts can be a better option for storing your money. Interest will grow over time depending on your APY. Your financial institution will tell you upfront what the APY will be for your savings account, so you can predict how much money you can earn over time.

You can typically keep adding money to your savings account over time to earn even more interest. Depending on your financial institution, you may be able to add funds by cash, check, ACH transfers, Wire transfers, mobile deposit, or direct deposit.

While some savings accounts are set up so that you can withdraw funds whenever you need them, others might have limits on when, how much, or how often you can withdraw funds. You should review these terms before opening a savings account so that you can choose the best one to fit your needs.

Why You Need a Savings Account & What is a Savings Account Used For?

As previously discussed, savings accounts are a great way to earn interest on your money. Once you’ve deposited the funds, no additional effort is required on your part to earn that interest, so it’s a great way to make some passive income. Even if your interest rate is low, it still gives you an opportunity to earn extra money that can add up over time.

You can also use your savings account to keep your funds separate from your checking account. If the funds aren’t readily available, you’ll be less tempted to spend that money. It’s the old out-of-sight, out-of-mind tactic. This is especially helpful if you’re trying to start an emergency fund or save money for a future event, like your kid’s education.

 In addition to emergencies and education, people also use their savings accounts for retirement, weddings, vacations, and more. Just keep in mind that generally, savings accounts are used for medium- or long-term plans. They’re less beneficial if you plan to deplete your savings account regularly or use it as a checking account.

Advantages of a Savings Account

One big advantage of a savings account is that most are federally insured and you don’t have to worry about losing money to fraud or theft. It can give you peace of mind that your money is safely tucked away for a rainy day.

Earning interest is also a huge advantage of having a savings account. Checking accounts generally don’t earn any interest, so you’re doing yourself a favor by keeping your money in an account that does earn some interest. Plus, if you choose to go with a high-yield or Certificate of Deposit, you can earn even more money than a standard savings account.

If your savings account is separate from your checking account, you’re also less likely to be tempted to use your funds for unnecessary purchases. So, for example, if you have a savings account set up in case of an emergency, you’ll really have the funds for that emergency when the time comes.

A lot of people will set up automatic deposits to their savings accounts from their paychecks or other income. When your savings are automatic and away from your day-to-day checking account, you’re able to keep the funds where they’re at and continue to grow your savings over time.

Disadvantages of a Savings Account

One downside of many savings accounts is that the money isn’t always easily accessible. Some accounts will have limits on how much, how often, or when you can withdraw the funds. This can limit you if you end up needing to pull money often. Although, this can be a good thing if you’re trying to limit your temptation to use that money for things you don’t need.

Another disadvantage is that some accounts may have a minimum deposit. This can be difficult if you don’t have a lot of funds upfront to put into a savings account. If you don’t have enough for the minimum deposit, you’ll need to look at other savings account options, possibly with lower rates.

Another downside is simply the hassle it takes for you to find the right account and take the time to open that account. If you’re really busy, it might feel better to simply keep your money in the account you already have. Only you can determine if the time and effort are worth it to earn extra interest.

Types of Savings Accounts

  • Standard or Traditional Savings Accounts: These are the most common savings accounts you may see at your local bank or credit union. They can often be tied to your checking account and may have lower interest rates than other types of savings accounts. You may also be able to withdraw from these accounts without limits or penalties.
  • High-Yield Savings Accounts: High-Yield accounts are typically similar to standard savings accounts, but they tend to offer a higher interest rate. This can help you grow your money even faster than you might be able to with a standard account and a lower rate.
  • Money Market Accounts: These are savings accounts that have some checking account features. While they may earn interest, you can often use them with a debit card or write checks. However, some money market accounts may still limit the number of transactions you make each month to that account.
  • Certificates of Deposit: Also known as CDs, these accounts hold money for a fixed amount of time, which can range from a few months to several years. You may be extremely limited or have a penalty to withdraw any funds from the account before the term is up. Generally, longer term CD rates can earn higher interest than traditional savings accounts.
  • Student Savings Accounts: There are several student savings account options out there to fit your needs. A common type of savings account for your child’s education is the 529 plan. Other accounts include custodial accounts, a Coverdell ESA, or a prepaid tuition plan. You can view a full list here.

How Much Should You Keep in Your Savings Account?

Since everyone’s finances are different, there’s no one-size-fits-all rule for how much money you should keep in your savings account. The honest answer is: however much you can afford to keep in your savings account or however much you need to meet your savings goals.

How much you keep in your savings account also depends on why you’re using it. If your goal with a savings account is to have enough for an emergency, set a goal of $1,000 or 3 months’ worth of your expenses. If your goal is to earn as much interest as possible, you’ll want to keep as much money as you can in your savings account.

How to Maximize Earnings of a Savings Account

One great way to maximize your savings account is to automatically deposit funds regularly. This way, you don’t have to remember to deposit the funds and you won’t even miss the funds. This makes it easier to build your savings account over time.

Adding to your savings account and having more money in your account can also maximize your savings because you’ll earn more interest. The more interest you can earn on your savings account, the better.

If you’re serious about maximizing your earnings, you may also want to consider one of the types of accounts that earn more interest than a standard savings account. You should shop around for savings accounts and compare rates at different financial institutions. It’s also okay to move to a different savings account if your goals change over time, as long as you’re staying within the terms of any accounts you’re currently using.