Savings Account – Definition, Uses, Alternatives and Examples

A savings account is a sort of bank account that provides a safe location to put your money and often offers compounding interest.

Definition and Examples of Savings Accounts

A savings account is a basic bank account into which you can deposit funds. You can withdraw funds from it; most banks will give you compound interest on the account balance. Many banks, credit unions, and other financial institutions, in addition to other accounts, provide savings accounts. You may even find savings accounts with higher interest rates than others.

How Do Savings Accounts Work?

The Federal Deposit Insurance Corporation insures money deposited in a savings account (FDIC). If the institution where your money is held fails, you will be reimbursed up to a specific amount. The FDIC only guarantees deposits up to $250,000 per depositor, insured bank, and ownership type. When you deposit money, it earns interest, which is credited to your account. As an incentive to save money, most savings accounts pay to compound interest. The newly created balance earns interest, and so on.

Using Your Account

You can use the funds in your savings account, but transactions are limited to six per month due to a Federal Reserve restriction. While there is a transfer limit, it is critical to understand that only certain sorts of transactions count against it. In-person transfers, transfers by mail, or ATM withdrawals from savings do not count toward the six-transfer-per-month rule and do not affect the account's status. The following acts count toward the six-transfer limit:

Transferring funds from one of your accounts to another
Pre-authorized, automatic, or telephone transfers to other parties
Withdrawals to pay a third party by check, debit card, or other similar instruments

When your account reaches six transactions, most banks will notify you. If you surpass the transfer limit, the law requires you to convert the account to a savings account. As long as you stick to the six-transfers-per-month limit, you can use your savings account to perform one of the following in most cases:

Deposit or withdraw cash: Going to the bank to deposit or withdraw cash or using an ATM is a typical way to make deposits and withdrawals.
Deposit checks: If your bank allows, you can deposit checks directly into a savings account. Check deposits into savings accounts may also be possible through your bank's mobile app.
Transfer to and from checking (internal): If you have a checking account, you can frequently transfer money from checking to savings within the same bank.
Electronic transfers (bank to bank): You can also make electronic deposits and withdrawals to and from another bank's savings account.
Direct deposit: You can have money deposited directly into your account if your job pays by direct deposit.
Request a check: IIn rare cases, you may want to have your bank create a large check utilizing funds from your savings account.

To evaluate savings accounts, consider the annual percentage yield (APY) and factors such as minimum deposit amounts, fees, and other features.

How to Get a Savings Account

It should take less than an hour to open a savings account (sometimes just a few minutes). The simplest way to open an account is to choose a bank you trust and apply online. If you want to do it in person, visit a nearby bank and inquire about creating an account. To open an account, at least one account holder must be at least 18 years old. Specifics differ for each bank, so if you're opening a savings account for a minor, it's a good idea to inquire. Numerous alternatives are available, so check with your bank before opening an account for one of your children. If you're looking at savings accounts, there are a few extra things to think about:

Different banks: Before opening an account, examine the interest rates, fees, and minimum balance requirements.
Credit unions: If you're considering joining a credit union, make sure you're eligible. Look for it online or call the credit union to inquire about creating an account.
Information you need: Check that you have all the information required to open an account. Government-issued identity (such as a driver's license, military ID, or other ID), your Social Security number, and a mailing address are all examples.

If you encounter an institution you're unfamiliar with, be sure it's FDIC or NCUSIF insured (for credit unions).

How Much Do Savings Accounts Cost?

While most savings accounts are free, there are certain restrictions and potential costs. Accounts typically have minimum balances that must be maintained. If you do not keep the required minimum amount, banks frequently levy a monthly or annual fee or both. Because the fees will be deducted from your account, overdraft fines are possible if your account balance falls to zero. Credit unions do not charge the same fees as banks. Most instead place a hold on a specific cash amount you must deposit when you start your account. For example, if the minimum amount is $25, you must deposit that amount to open your account, and you will not have access to it for the duration of your account's existence. Some banks or credit unions will waive savings account fees if you have another account. Because the accounts are generally grouped, you may be charged penalties if you close your checking account while keeping the savings account.

Alternatives to Savings Accounts

While many people go to their local bank to start a savings account, the rates you'll find there are likely to be very modest. You can try something different than standard savings account to earn the best possible interest rate.

Online Savings Accounts

Online-only accounts are a terrific way to earn more money while paying fewer fees. Online banks do not have the same overhead costs as physical banks. As a result of cheaper fees, several of the highest-yielding savings accounts are available through online banks. Many online banks also allow you to open an account with no minimum deposit, while higher-yielding accounts may require bigger deposits. You can contribute money by depositing checks using your mobile device. Although these are online banks with no physical branches, you will frequently receive an ATM card for cash withdrawal. You can also electronically transfer funds to or from your local bank or credit union in roughly three business days.

Money Market Accounts

Money market accounts, like savings accounts, offer interest on deposits and limit how frequently you can make certain transfers. However, they often pay more than savings accounts and allow you to spend your money more quickly. If you want to compare accounts, seek those with the best interest rates. These accounts typically have a payment card or checkbook that you may use to spend up to three times per month, making them ideal for emergency savings or large, occasional expenditures.

Certificates of Deposit (CDs)

You might be able to earn more with a CD if you can commit to leaving your savings untouched for at least six months. These accounts have varied time commitments, and you may be penalized if you cash out too soon. Some CDs are flexible, allowing for penalty-free early withdrawals, although the flexibility frequently comes at a somewhat lower interest rate.

Key Takeaways

A savings account is a service provided by a bank that allows you to store your money while receiving interest on your deposits.
You earn interest by lending money to the bank, which then loans it to other people and businesses.
To access your saved money, you'll frequently need to transfer dollars from a savings account.
To earn better interest rates, you should look into alternatives to a savings account.