Savings Account: Definition & How to Open One

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A savings account is a basic type of bank account that allows you to deposit money, keep it safe, and withdraw funds, all while earning interest. Savings accounts offered by most banks, credit unions, and other financial institutions are FDIC insured and typically pay interest on your deposits. Interest rates are relatively low, with the average account paying less than 1 percent annually as of late 2018. Still, some savings accounts offer higher interest rates than others.

If you are looking to grow your money more quickly while still keeping your money safe, stay up to date with the best savings accounts and interest rates.

Savings Account Benefits

It’s generally wise to have a savings account, and they’re mostly free—especially at online banks, community banks, and credit unions. Keeping cash elsewhere that you don’t plan to spend in the immediate future is unsafe, and using a savings account has a psychological benefit: It’s tempting to spend money in hand. A savings account, however, can be a means of setting aside funds to reach longer-term goals.

True Cost and Limitations

While savings accounts typically are free, there are limitations and potential costs. Accounts generally have minimum balances they require you to maintain. Banks often will charge a monthly fee, an annual fee, or both if you do not maintain this minimum balance. The fees will be withdrawn from your account, so there is a possibility you also could be charged overdraft fees if the account balance goes below zero.

Credit unions don't charge fees the same way banks do. Instead, most put a hold on a specified dollar amount that you must deposit when you open your account. For example, if the amount being held is $25, you'll need to deposit that money to start your account, and you won't have access to it for as long as your account is open. When you close the account, you'll get that money back.

Some banks or credit unions will charge no fees for a savings account if you also have another account with that institution. For example, opening a checking account may give you access to a savings account with no additional fees, but if you close your checking account while keeping the savings account, the fee structure likely will change.

Because savings accounts are designed for savings, there also is a limit to the number of withdrawals that can be made. The Federal Reserve sets this number at six, as of 2018. If you make more withdrawals than this, the bank likely will change your account to a checking account or another similar transaction account, which may come with a different fee structure. Check with your individual bank to see how they address this.

Safety

A savings account holds your money in a safe place: your bank or credit union.

Cash that’s outside of the bank can get stolen or damaged in a fire. But when the federal government insures your savings, you avoid the risk of losing money if your bank or credit union fails. Banks are covered by FDIC insurance, and credit unions are covered by NCUSIF insurance. Savings accounts at credit unions often are called share accounts.

Savings accounts offer easy access to your cash. Once you’re ready to spend money, you can withdraw cash or transfer funds to your checking account to pay by check, debit card, or an electronic funds transfer. You can make cash withdrawals from your savings account at an ATM or with your bank’s tellers.

Growth

Savings accounts pay interest on money in your account. As a result, your bank will make small additions to your account, typically every month. The interest rate depends on economic conditions and your bank’s desire to compete with other banks. Savings account rates are generally not very high and may not even match inflation, but your risk of loss is virtually nonexistent when your funds are federally insured. A little bit of interest is better than nothing, which typically is what you'll get from a checking account.

To compare savings accounts, you'll want to look at the annual percentage rate (APY) paid on the account, as well as details like minimum deposit amounts, fees, and other features.

How to Open a Savings Account

Opening a savings account should take less than an hour (sometimes just a few minutes), and the account will serve you for many years to come. The easiest way to open an account is to do it online or with your mobile device. If you prefer in-person guidance, visit a bank branch.

  1. Compare banks by reviewing interest rates, fees, minimum balance requirements, and other services. Savings accounts don’t pay much, so any fees most likely will eat into the money you deposited—in addition to wiping out any earnings in the account.
  2. If you’re considering credit unions, verify that you’re eligible to join. Look for that information online, or call the credit union and ask about opening an account.
  3. Choose the bank or credit union that meets your needs. Get an account that’s easy to use and that you’ll actually put money into, whether that means the branch is conveniently located or the mobile app makes sense to you. A slightly higher savings rate is not critical unless you’re going to make large deposits.
  1. Gather the information you need to open an account: government-issued identification (a driver’s license number, military ID, or other ID), your Social Security number, and a mailing address.
  2. Open an account online or in person by submitting an application.
  3. Fund the account with an initial deposit if required.

To open an account, at least one account holder needs to be 18 years old or older. Specifics vary from bank to bank, so ask customer service for details if you’re opening an account for a minor. Several options are available for saving money for a person younger than 18, so evaluate all of the options.

Talk to the staff at small banks and credit unions if you have significant assets. Ask what they can offer if you bring your deposits to them. The institution’s president may be just down the hall, and you may get a nice offer on the spot. Consider how long you can lock up your assets and ask what they can offer for a 12- or 36-month commitment.

If you find yourself looking at institutions you’re not familiar with, be sure that they’re FDIC insured, or NCUSIF insured if it’s a credit union.

Using Your Account

A savings account is a good place to keep money safe for future needs. Savings accounts are particularly useful for the money you may need within the next few years. You might not earn much in savings, but as long as your funds are federally insured and you’re fee-conscious, you’re not going to lose that money either.

Some common uses of savings accounts are as follows:

  • Saving for major purchases: If you’re planning to buy a house or a car within the next few years, you’ll probably need a down payment to qualify for a loan—and get the best terms. A savings account is a good place to build and store that down payment while you’re getting ready to buy.
  • Vacations or other upcoming expenses: You’ll enjoy your vacation even more if you’re not going into debt and you have sufficient funds to pay for all of that fun. Build up a vacation fund in a savings account by transferring money from your earnings every month. By getting that money out of your checking account, you won’t be tempted to spend it.
  • Emergency savings: Life always manages to surprise us. An emergency fund can help you avoid taking on toxic debt. Funds in a savings account are generally accessible without any penalty, so you can take care of issues quickly.

Multiple Savings Accounts

Some people like to maintain more than one savings account, assigning different purposes to each one. For example, you might have a savings account designated for Christmas. By contributing a little bit at a time throughout the year, holiday expenses might be less of a burden. As another example, you might be saving for a major purchase like a down payment on your first house.

There are many reasons to have multiple savings accounts, and as long as the accounts don't come with fees that strip away your interest earnings, you should go this route if it is the best way for you to manage your savings.

The primary benefit to multiple savings accounts is the ability to keep tabs on how much money you have for specific purposes. With dedicated savings accounts, tracking your progress is easier.

The primary drawbacks are potential fees and the possibility that managing multiple accounts might be burdensome. Many online savings accounts, though, offer good rates with low minimum balances that allow you to avoid fees. With applicable online banking apps, it's very easy to move money from one account to another.

Adding Funds to Your Account

When it comes time to contribute money to your savings account, you take one of the following steps:

  • Deposit cash: A traditional way to make deposits is to bring cash to a bank or credit union branch. You also can make deposits at some ATMs, allowing you to deposit cash outside of banking hours or at a location that’s more convenient for you.
  • Deposit checks: You can deposit checks directly into a savings account. When you make the deposit, just put your savings account number on the deposit slip. With most banks, it’s also possible to deposit checks with your mobile device—so you don’t need to go anywhere near a branch or ATM. Funds will be available in a day or longer, depending on your bank’s policies.
  • Transfer from checking (internal): If you have a checking account, moving money from checking to savings within the same bank is easy, and it’s often instant. Just use your bank’s app, website, or customer service line to make the move. Get that money out of checking so that you know that it’s reserved for something else.
  • Electronic transfer (bank to bank): You also can make electronic deposits to a savings account from another bank. For example, link your local brick-and-mortar account to an online account that pays more or allows you to set up subaccounts to help you save for goals.
  • Direct deposit: If your employer pays by direct deposit, ask if you can have your payments split so that some of it goes directly to a savings account. That money will never hit your checking account, so you’ll save without even trying.

Accessing Money

To use your money, you’ll often need to move funds out of a savings account. In most cases, it’ll go to a checking account, and you can write a check, use online bill payment, or use your debit card for spending. But there are several ways to use money from savings.

  • Withdraw cash: If you want physical cash, you can get funds from an ATM. You can make unlimited withdrawals from ATMs or in person with a teller.
  • Transfer to checking (internal): Moving money to a checking account in the same bank is fast and easy. Just contact customer service or make the transfer using your bank’s app or website.
  • Electronic transfer (bank to bank): It’s also easy to move funds to a different bank, but the process can take several business days unless you wire the money for an additional fee.
  • Request a check: In some situations, it might be easiest to have your bank print a check using funds from your savings account. For example, when making a down payment on a house, your bank can create a cashier’s check payable to a title company or seller.

Alternatives to the Basic Savings Account

While many people head to their local bank when it comes time to open a savings account, it's likely that the rates you find there will be relatively low. To get the best possible rate, you might consider something different than a basic savings account.

  • Online savings accounts: Online-only accounts are a great option for higher earnings and lower fees. Online banks don’t have the same overhead costs as brick-and-mortar banks. The result is that many of the highest-yield savings accounts can be found at online banks. Online banks often allow you to get started with as little as one dollar, though some of the higher-yielding accounts require larger deposits. Despite being online banks with no physical branches, you’ll often get an ATM card for withdrawing cash. You also can transfer funds to (or from) your local bank or credit union electronically in about three business days. To add money, you can deposit checks with your mobile device.
  • Money market accounts: Similar to savings accounts, money market accounts pay interest on your deposits and limit how often you can make certain transfers. However, they typically pay more than savings accounts, and it’s easier to spend your money. If you are interested in comparing accounts, check out the best money market rates. These accounts usually provide a payment card or checkbook you can use for spending up to three times each month, so they’re useful for emergency savings or large, infrequent payments.
  • Certificates of deposit (CDs): If you can commit to leaving your savings untouched for at least six months, you might be able to earn more in a CD. These accounts come with varying time commitments, but you may have to pay a penalty if you cash out early. Some CDs are flexible, offering penalty-free early withdrawals, but the flexibility often comes with a slightly lower rate.