What Is a Savings Account? Learn Savings Account Basics

Savings accounts offer more than low interest rates.

In a world where people must take on numerous financial responsibilities, saving money has become more critical than ever. Savings accounts are interest-bearing bank accounts where the frequency and methods of withdrawals are subject to limitations. Although savings accounts will probably not make you rich, they can become a valuable tool in helping you to meet financial goals.

Here’s a quick look at what you find in this guide to understanding savings accounts: 

What Is a Savings Account?

A savings account is ideal for keeping money that you will need at a later time, such as an emergency fund or savings for a down payment.  Unlike a checking account, which is designed for frequent withdrawals and direct purchases, savings accounts focus on drawing interest and limited withdrawal activities. 

A variety of options exist for opening a savings account. You can open an online savings account or a savings account at a brick-and-mortar bank or credit union, depending on your preference.

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How Does a Savings Account Work?

A savings account works by growing your deposit overtime with interest earned. When you fund a savings account, the bank or financial institution loans your money to other people and charges them interest. In return, the financial institution pays you interest for allowing them to loan out your money.

Regardless if that person can pay back their loan, your money is protected. Savings accounts in the United States are insured up to $250,000 by the FDIC or NCUA.

 Savings Accounts Fees, Limits and Charges

If you decide to open a savings account, you should keep the following in mind:

  • Fees and Monthly Minimums: In some cases, banks may require a minimum balance in your savings to avoid fees. For example, banks may charge maintenance fees should the minimum balance fall below a specific threshold. For best results, carefully weigh your options to find a savings account that will allow you to avoid minimums and fees. It may be easier if you have a few hundred dollars available to get your account started.
  • Interest Charges: Admittedly, interest earned in a bank account remains modest. However, even if the account pays an annual percentage yield in the 0.5% or 1% range, this still exceeds that of checking accounts, which rarely pay interest. In some cases, high-yield savings accounts may also be an option. 
  • Withdrawal limits: Federal law limits the number of withdrawals and transfers to six per four-week period. Therefore, you will have a reduced ability to make direct purchases with funds in this account.
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Should I Open a Savings Account?

Yes, assuming you have something to keep in a savings account — at least enough money to meet account minimums and avoid paying maintenance fees. 

Once you open your savings account, set an initial savings goal to build an emergency fund. Most experts recommend having three to six months of living expenses in your savings account to help counteract a job loss or other financial emergency.

Unfortunately, most people do not have anywhere close to that amount in their savings accounts. In fact, according to GOBankingRates’ sixth annual savings survey, 69% of Americans have less than $1,000 in savings

Some experts advocate opening a separate savings account for each savings goal you have. In addition to your emergency fund, you might have goals such as a vacation, paying cash for your next vehicle or saving for a down payment on a house. 

One other strategy you might consider is automatic savings deposits, right from your paycheck. Financial author and columnist Suze Orman recommends this approach. Orman believes it doesn’t matter whether you contribute $10 per month or $250 or $1,000, but she insists that you contribute automatically. She considers this an excellent “set it and forget it” approach for reaching savings goals

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Other Types of Savings Accounts

Savings accounts come in several different forms. With different rules and investment options, some can offer higher returns without putting your money at risk. Other savings accounts offer beneficial tax benefits, and most include Federal Deposit Insurance Corporation or National Credit Union Association insurance protection. 

Certificates of Deposit

Certificates of deposit are savings accounts with more limited withdrawal rules. They allow you to lock away money for a specific amount of time at a specified rate. Although this instrument may pay a higher interest rate than a traditional savings account, early withdrawals can involve penalties. Moreover, with a lock-up period, CDs are not suitable for funds you might need in an emergency. 

Compare: Best CD Rates and Accounts of 2020

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Money Market Accounts

Money market accounts are another type of savings account. Account holders cannot make more than six withdrawals per month with this type of account. You can, however, make withdrawals by check, debit card, bank draft or electronic transfer, provided you adhere to the withdrawal limits. No restrictions apply to the number of ATM or in-person withdrawals made from a money market account.  

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Cash Management Accounts

Cash management accounts are nonbank deposit accounts. For the most part, these accounts are insured by FDIC or NCUA financial institutions. The features, restrictions and fees on CMAs will vary. Many will act as a hybrid checking and savings account, allowing you to meet expenses while earning a higher interest rate. However, those needing a degree of separation between checking and savings may not want this type of account. 

Check Out: 4 High-Performing Savings Accounts You Don’t Need a Bank To Get

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Health Savings Accounts

If you are in an eligible, high-deductible health plan, health savings accounts allow you to contribute to a specific amount per year and pay for qualified medical expenses using before-tax dollars. Moreover, unused funds can carry over to the next year. HSAs should also not be confused with flexible spending accounts, which are employer-controlled. 

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Getting a Savings Account

If you’re ready to open a savings account, the most obvious place to look is your local bank or credit union. Your financial institution of choice can quote interest rates, as well as explain any limitations, fees and minimums that come with each savings account.

With relatively low interest rates, savings accounts do not seem like they are worth the effort at first glance. However, with the opportunity for spending discipline and, in some cases, tax deductions, these separate accounts could provide you with a valuable tool in your financial success.

Click through to see the best savings accounts available in 2020.

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About the Author

Will Healy

Will Healy is a freelance business and financial writer based in the Dallas area. He has covered a variety of finance and news-based topics, including the stock market, real estate, insurance, personal finance, macroeconomics, and politics. Will holds a Bachelor of Science in Journalism from Texas A&M University, a Master of Science in Geography from the University of North Texas, and a Master of Business Administration from the University of Texas at Dallas.

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