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What is a savings account?
Whether you are putting aside money for emergencies, saving for a new car, or just creating a little cushion, savings accounts can be very helpful.
Unlike most checking accounts, where money flows in and out frequently to pay for everyday expenses, you can accumulate money in a savings account for whatever finance goal you have in mind. You might deposit a bit of your paycheck every time you get paid, put aside income from a second job or side gig, or sweep in extra cash that you don't need right away in your checking account.
Your savings account may also be a backstop in case you overdraw your checking account, which can help you avoid overdraft fees.
And the nice thing is that your savings account will earn interest. After all, the bank is using your savings (and those of thousands of other customers) to lend to borrowers, who then pay interest on their loans. Some of that interest comes back to you. The interest rate varies based on the type of savings account you have.
In this article, you'll learn about the different types of savings accounts, the benefits of having one and how to get started.
What are regular savings accounts?
Regular savings accounts are interest-bearing deposit accounts held at a bank or other financial institution, whether it's exclusively online or has brick-and-mortar locations. These accounts typically pay a modest interest rate. However, their safety and reliability make them an ideal partner to a checking account and a path toward reaching short-term financial goals.
Like other bank accounts at insured financial institutions, savings accounts are FDIC insured. The Federal Deposit Insurance Corporation, a government entity, backs them for up to $250,000 per depositor.
Regular savings accounts are intended for short-term savings and easy access in case the funds are needed, unlike money that's tied up in investments or long-term savings instruments such as certificates of deposit. That said, while you may be able to withdraw money from a savings account at an ATM using a debit card, it's not designed for frequent transactions. In fact, some accounts limit the number of transactions per statement cycle.
How do savings accounts work?
Savings accounts are relatively easy to understand. You open a savings account at a bank and make an initial deposit. Then, continue adding funds and watch your balance grow. Custodial accounts can be opened by parents or guardians on behalf of minors.
Money can be added to personal savings accounts by:
- Making cash deposits or check deposits at an ATM or bank location
- Transferring funds from other bank accounts
- Making mobile deposits
- Setting up direct deposit with an employer or other income source
Good account management includes staying above the minimum monthly balance to avoid a monthly maintenance fee. Many banks give you several ways to avoid a monthly maintenance fee, such as linking your checking and savings accounts.
Now, about interest accounts.
Your savings account can earn interest, but the rates vary by bank and type of account. Longer-term savings, such as CDs, tend to pay more interest than basic personal savings accounts. Interest is considered taxable income and should be reported to the IRS. The bank will send you a 1099 form if the annual interest income exceeds $10.
When shopping for a savings account, consider the APY—annual percentage yield—as well as the interest rate. APY reflects the total amount of interest you earn on money in an account over one year, while an interest rate is the rate at which interest is earned on the original amount. Both are expressed as percentages.
Benefits of savings accounts
Why should you open a savings account? There are several good reasons.
Earn interest
As we've seen, money in a deposit account works for you — without any effort on your part
Encourage savings habits
Learning to save is a skill that people — especially young people — need to cultivate to ensure a stable financial future. Helping a younger child or teen get in the habit of saving will pay benefits down the road
Easy access to funds
Because a savings account is intended to serve shorter term financial needs, the funds are liquid and are easily withdrawn if needed. The entire balance can be withdrawn if the need arises or transferred to spending accounts
Automatic deposits
Speaking of savings habits, a savings account is the ideal place to directly deposit a portion of your regular pay or salary. The money goes into an account without you having to think about it
Convenient monitoring
It's easy to view balances online or through your banking app
Withdraw at an ATM
While many savings accounts will not issue a debit card, they will issue an ATM card. Plus, the debit card you have for your checking account will likely give you access to your savings account
Deposits made easy
Put money into savings at the ATM or through the bank's mobile app
Choosing a savings account
Banks have developed different types of savings accounts to meet a variety of consumer needs. The best account, or accounts, for you depends on your financial goals. Knowing how the savings account options compare can make it easier to select the right place to keep your money. Some questions to consider:
- Is this account designed for any specific purpose or goal?
- What is the interest rate and APY?
- Are there minimum deposit or balance requirements to avoid a monthly maintenance fee?
- Does the bank charge any other fees for this type of account?
- Are there any tax advantages associated with this savings account?
- How accessible is the money?
- Are there limitations or penalties on withdrawals?
Here are some of the choices:
Traditional or regular savings accounts
These are the most basic savings options. They are easy to set up, provide convenience and integrate easily with other accounts, such as a consumer checking account. In exchange for that convenience, liquidity, and easy access to funds, the interest rates tend to be modest.
These accounts may be subject to a monthly maintenance fee, so be sure to request a fee schedule when shopping for an account.
High yield savings accounts
High-yield or high-rate savings accounts, as the name suggests, pay higher interest rates than typical savings accounts. They are like money market accounts. With a high-yield account, there may be a significant opening deposit required, a minimum balance requirement, and a limit on the number of monthly withdrawals.
Student savings accounts
Savings accounts for minors fall into a few categories. Some banks offer kid-friendly savings accounts (jointly held, of course, with parents) that offer significant APYs along with educational components. A parent or guardian can also set up a custodial account for a minor child; deposits are subject to the annual gift tax exclusion of $18,000 for 2024.
Heads up from the IRS: If your child's interest, dividends, and other unearned income totals more than $2,500, it may be subject to a specific tax on the unearned income.