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- A savings account is a bank account where you can keep your emergency fund or short-term savings.
- You can earn an annual percentage yield (APY) through a savings account.
- Savings accounts also have various opening requirements and fees depending on where you bank.
A savings account is a bank account where you can keep your savings. Not sure how it works, or what makes it different from a checking account?
We'll explain what a savings account is, how it works, and provide tips regarding its features and fees.
Savings account definition
A savings account is an interest-earning bank account. While the purpose of a checking account is to manage your spending, a savings account is a place to grow some of your savings.
"A savings account is the best introduction to the concept of putting your money to work for you," explains Sefa Mawuli, a CFP professional and financial planner at Pavlov Financial Planning. "Generally with a savings account, you're looking for an account that offers some interest, so some kind of yield. It's giving you some money back if you put money in it."
Mawuli points out that you'll want to consider investment accounts for long-term goals and use a savings account for an emergency fund or short-term savings goals. A short-term savings goal will be something you want to save money for in a few months or years, like an upcoming vacation or a down payment on a home.
Savings account features
Regardless of where you choose to open a savings account, many have similar characteristics that help these accounts ideal for your short-term savings.
Here's an overview of savings account features:
- Annual Percentage Yield (APY): The APY on a bank account tells you how much you'll earn on interest during a year. Depending on the type of savings account you open, the APY can be fixed or variable. The APY will always be listed as a percentage. For example, our guide for best savings accounts has high-yield savings accounts that pay significantly higher rates than most banks.
- Fees: The most common bank fees you'll find on savings accounts include monthly service fees, paper statement fees, and excess withdrawal fees. A monthly service fee occurs when a bank charges you each month for its services. A paper statement fee happens when a bank charges you for getting paper statements mailed to you. An excess withdrawal fee occurs when you exceed the monthly transaction limit for a savings account. Usually, you'll be able to waive monthly service fees by fulfilling certain activities and avoid paper statement fees by signing up for online bank statements. Some banks also don't charge any of these types of fees.
- Minimum opening deposit: When you open a savings account, some banks will require a certain amount of money for an initial deposit. However, others let you open a savings account with $0 upfront.
- Minimum balance requirements: Some bank accounts require a certain minimum balance to earn interest or avoid a monthly service fee. The savings account disclosure will usually specify whether an account has minimum balance requirements, but you can also contact a banker to clarify how this feature impacts a particular account.
- FDIC or NCUA insurance: Your money will be safe in a savings account if the financial institution is federally insured by the NCUA or FDIC. These government agencies guarantee that your money will still be available even if a financial institution shuts down. The NCUA oversees credit unions, while the FDIC manages banks. Generally, if a bank shuts down, your money will be moved to another bank or mailed as a check. Up to $250,000 per depositor is federally insured by the NCUA or FDIC.
Savings accounts aren't required to have paper checks or debit cards since you aren't making as many transactions or withdrawals as you would with a checking account. That said, you can still find some savings accounts with a debit card or ATM card.
How does a savings account work?
Many financial institutions let you open a savings account online. You can also open a savings account at a branch (just make sure to take all the necessary documents).
Financial institutions have different minimum opening requirements, minimum balance requirements, and fees. You'll also want to review how the interest rate and transaction limits work to better understand your account.
Some banks may compound interest daily, monthly, or quarterly. Understanding how interest is calculated in a savings account can be beneficial when deciding whether to keep money in a savings account or deposit it elsewhere.
According to the federal rule Regulation D, savings accounts have transaction limits. This means you'll only be permitted to make six transfers from the account per month. If you exceed the monthly limit, you will have to pay a fee for each additional transfer.
The Board of Governors of the Federal Reserve has recently amended Regulation D. Banks may now choose to suspend the monthly transfer limit so customers can make unlimited monthly transactions, or they could enforce a six-per-month limit.
What else you need to know about savings accounts
Be aware there are several types of savings accounts, and the best option for you will likely depend on where you prefer to bank and when you'll need to access your money.
If you decide to open a savings account at an online or brick-and-mortar bank, you'll likely have access to a couple of types of savings options, like traditional savings accounts, CDs, high-yield savings accounts, money market accounts, or specialty savings accounts. If you select an online banking or investment platform, you'll likely have fewer options, but you may find other benefits, like high interest rates. Bear in mind you can also open multiple types of savings accounts if they align with your goals.
Frequently asked questions on savings accounts
How much money is safe in a savings account?
Up to $250,000 per depositor is secure in a savings account where the bank is federally insured by the NCUA or FDIC.
Are savings accounts safer than checking accounts?
Savings accounts and checking accounts are equally safe. Savings accounts and checking accounts are covered for the same amount by the NCUA or FDIC.