Instead of your cash sitting idly in your wallet or other safekeeping spot, it could be growing (safely) in a savings account. If you’re wondering what is a savings account, we’re here to help. It’s a type of bank account offered by most banks and credit unions that’s easily accessible and typically earns you a little interest. They can come with transaction limits, which makes them best for longer-term savings goals. So, dust off your cash and put it to work.
A savings account is a secure, interest-bearing bank account that’s ideal for saving for medium to long-term goals. Whether you’re looking to buy a car in six months or you just have extra cash, you might open this type of account to make that money grow while still being able to access it easily.
This type of bank account typically limits your transactions to six per month, which is why it’s best to use it sparingly.
Savings accounts are designed for fewer transactions while checking accounts are for more frequent, everyday transactions, like paying bills. Unlike savings accounts, checking accounts don’t have transaction limits. Checking accounts also make it easier to access your money with debit cards, checks and online bill pay.
With checking accounts, your main fees to look out for are overdraft fees and out-of-network ATM fees. With savings, steer clear of going over any transaction limits to avoid fees. Both types of accounts can also have monthly maintenance fees.
Lastly, savings accounts generally offer better interest rates than checking accounts. There are high-yield checking accounts that offer decent annual percentage yield (APY).
They’re pretty simple. You apply for the account online or in person, and once approved, you can deposit funds (sometimes a minimum opening deposit is required) into the account. Your money starts earning interest at a certain annual percentage yield (APY).
Unfortunately, many big banks will offer you the lowest APY possible (0.01%). Luckily, online banks are a bit of a gold mine for high-yield savings — you can get some of the best rates with them if earning interest is your priority.
There are typically transaction limits (six per month) on savings accounts. This rule, called Regulation D, was enforced by the Federal Reserve before they suspended it during the COVID-19 pandemic. Some institutions still enforce the rule (or have their own unique transaction limits), so be sure to check your bank or credit union’s fine print.
They can have various fees: most commonly monthly maintenance fees or transaction limit fees. (Just read your account’s disclosures or ask a banker for clarity if a financial institution’s website isn’t clear.) They also tend to allow you to make automatic transfers, move funds in savings buckets and collect direct deposit.
Your money will be safest at a bank that’s insured by the Federal Deposit Insurance Corporation (FDIC) or a credit union that’s insured by the National Credit Union Administration (NCUA). In the event of an institution failure, your savings will be insured for up to $250,000 per depositor, per bank, per ownership category.
The amount of interest you earn depends on the APY being offered on the account, how much money is in your account, the compounding schedule and how long you save.
Let’s say you start with a principal amount of $100 and earn 3% APY in an account with monthly compounding interest. Instead of just earning 3% on $100 all year, you’ll actually earn 3% each month. That means on a $100 balance in the first month, you’ll earn $3 in interest, making your new total $103. The next month’s interest will be calculated based on your new balance of $103, earning you $3.09 in interest. To simplify this process, though, you can use MagnifyMoney’s compound interest calculator.
In your search for the right account, you’ll come across the following types:
A savings account is a common staple in anyone’s financial portfolio, and there’s little risk involved with having one. In fact, automating your savings can be an essential step in building wealth. But if these accounts are new to you, here are some pros and cons to keep in mind.
|Easy to open and link to other accounts, like a checking account||May include minimum opening deposit or minimum balance to earn APY|
|Your money is secure if opened at an FDIC-insured bank or NCUA-insured credit union||May earn you less than other types of savings accounts, such as CDs|
|Financial institutions generally pay interest on savings accounts||Usually no debit or ATM card|
|Easy to withdraw funds, making it a good home for your emergency fund or other savings||Typically a limit of six transfers per month|
|Some banks and credit unions will reward you with a bonus for opening a savings account||Monthly maintenance fees, minimum balance fees and other fees can add up|
Applying for an account should only take a few minutes. Here’s what you can expect.
You can either close the account in person, submit a written cancellation request or close it over the phone. Just make sure that all automated payments are redirected to your new account.
The amount you keep in savings depends on your savings goals. If you’re saving for a car or a down payment, those will likely influence how much you need to save. If you’re looking to save up an emergency fund, most experts recommend saving three to six months of expenses.
Yes. A routing number is the number associated with a particular bank or credit union. You can find your routing number on your account statement or in your online account.
It depends. The majority of banks only do soft inquiries on your credit before working with you. However, some will run a hard inquiry on your credit, which can lower your credit score by a few points. But it should only impact your credit score for a few months.