Putting money away into a savings account can be a good thing for many people, allowing you to save for anything you want or need, as well as emergencies and retirement. Various savings account options are available, each offering different features and resources to help consumers save. Even if you only have $50 to open a savings account, doing so will help encourage better financial stability and decision-making.
What Is a Savings Account?
A savings account is an account offered by a financial institution that is designed to hold funds for the long term. Instead of a checking account that typically has money coming into it as you earn money and going out of it often as you pay bills, a savings account is one in which you’ll maintain funds for a more extended period. Typically, savings accounts will earn interest on the amount you tuck away – which means your money is working to make you money over time.
Types of Savings Accounts
Several types of savings accounts are available today, each with its benefits and features. It is well worth considering several options to determine which savings account best meets your needs.
Traditional/Regular
A traditional or regular savings account is the most common. These are available from banks, credit unions, and other financial institutions. Savings accounts from a bank are typically protected under the Federal Deposit Insurance Corp (FDIC) for up to $250,000. That means there is minimal risk to your money up to that dollar amount.
If you hope for a traditional savings account with a credit union, be sure it is protected by the National Credit Union Administration (NCUA). This membership works just like FDIC but is designed for credit unions.
Basic savings accounts provide excellent tools:
- You can deposit your money in person at a teller, ATM, or digital transfer.
- Account holders still have access to their money when needed, such as by transferring the funds from their savings to checking or making a withdrawal from an ATM or the teller at a bank.
- These accounts typically have a limit of no more than six withdrawals within the statement cycle. Be sure to know what limitations exist within your bank.
- Interest rates on traditional savings accounts are typically low compared to other accounts. However, you can compare accounts to determine which can offer you the best overall terms and conditions.
- Most traditional savings accounts do not have high fees. However, be sure to verify this before assuming that is the case.
It is fast and easy to open most savings accounts. You will need to have identification and an initial amount to deposit, and you may be able to open one online.
Online
In recent years, online savings accounts have become more accessible and beneficial to consumers. While many brick-and-mortar banks and credit unions provide tools to allow consumers to open and use their savings accounts through apps or websites, some online savings accounts do not have physical locations.
You can access your money from your laptop or smartphone at these sites by logging into the account. That’s a nice benefit for those who do not want to rely on visiting a physical location to access their funds.
Online savings accounts from reputable providers are FDIC members, meaning they carry the same protections as traditional bank accounts. Some will offer a higher interest rate than conventional banks because they tend to have lower overhead costs, meaning they can often pass on that savings potential to their borrowers. Yet, it is essential to compare accounts to find the best solution for your needs.
Online checking accounts are ideal for those who want to do digital banking. Be sure to compare them and understand any limits on access and fees.
High-Yield
A third option is a high-yield savings account. These work similarly to traditional savings accounts but tend to pay at a higher interest rate. These accounts offer higher interest rates typically because they require consumers to maintain a higher account balance. You may have to meet a minimum payment or keep the funds in the account for extended periods.
These accounts can be a good choice for those who plan to build their savings quickly and want to earn the most possible. There are still limitations to these accounts, though you maintain easy access to the funds. In most cases, they are also FDIC or NCUA members (be sure to verify this).
When Should You Use a Savings Account?
A savings account is always a good idea, even if you need more money. Even depositing $50 each month will allow you to build up to $600 annually. That’s money you can use for emergencies and long-term goals, like down payments on a car or a home.
Key Savings Account Terms
There are a few terms to keep in mind regarding savings accounts:
- Interest rates: The interest rate on a savings account is the percentage paid annually based on your account balance. If you have $1,000 in an account offering a 1% interest rate, you will earn $10 each year.
- Annual percentage yield: This is the effective rate of return earned on an account in a single year after taking into account the effect of compounding interest.
- Routing number: This is the number that represents the bank that is maintaining your account.
- Account number: This is a number that represents your specific account.
Evaluating Different Savings Accounts
When choosing a savings account, be sure to compare several features among various banks and credit unions, including:
- Interest rates earned
- Fees for opening or maintaining the account
- Minimum deposit requirements
- Access and limitations on your funds
Savings accounts are a valuable financial tool; using them can help you build your financial security over time.