A savings account is a safe place to store money you don’t need immediately. It is typically federally insured, at least up to a point, and yields interest, though some more than others. Ideally, you’ll use a savings account to achieve a specific goal, such as establishing a robust emergency fund or amassing down payment on a future home purchase.
What is a savings account?
A savings account is an interest-bearing account at a financial institution, such as a bank or credit union. Your deposits are typically insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per bank, per account type.
If you use a credit union, those savings accounts have the same deposit insurance but are backed by a different government agency called the National Credit Union Administration (NCUA).
Avoid accounts that don’t offer this insurance.
A savings account isn’t a checking account. You’re typically limited to six withdrawals a month, though some banks have removed that restriction. Regardless, a checking account is more for cash management (money in, money out), than accumulation.
Rather, it is a low-risk option to build, or maintain, a chunk of change that you’ll need either sometime in the future or in case of emergency. The trick is to find one that at least somewhat keeps up with inflation.
For instance, prices rose 8.5% in March 2022 over the prior 12 months, while the national savings rate was just 0.06%.
How does a savings account work?
A savings account is like the back room at a store that holds extra inventory until it’s needed. Your savings account holds the money you don’t need to constantly or immediately use until you do need it.
Each savings account has its own eligibility and maintenance requirements. For many, if not most traditional accounts, the minimum deposit you need to open and maintain it is nominal, $0 to $5.
Many also don’t charge monthly fees, and the ones that do typically allow you to waive them through attainable requirements, such as maintaining a certain amount in the account over time.
Prioritize accounts with high comparative yields. Not only will this help you somewhat maintain the buying power of your rainy day fund in the face of inflation, but you’ll enjoy the positive moment of passive income increasing your account balance.
Different types of savings accounts
All of these savings accounts are insured by the FDIC or NCUA up to $250,000 per person, per financial institution.
Traditional savings account. This is the standard type of account you’ll find at most brick-and-mortar banks and credit unions. Typically, the yield is modest but the fees are low or non-existent. For the sake of ease and convenience, customers may opt for a lower yield from a bank with which they have an existing relationship. Doing so, though, can cost you several percentage points in yield.
High-yield savings account. A traditional account that offers a much higher interest rate on deposits. There are usually no fees but there may be a higher minimum deposit requirement. Banks can raise and lower yields on a dime, though, depending on market conditions. Therefore the rate you have today, isn’t necessarily the rate you’ll have tomorrow.
Money market account (MMA). A hybrid between a checking and a savings account, MMAs let you write checks while also earning interest. You may still be limited to six withdrawals, however, and may need a higher minimum opening deposit, which can range from $10 to $1,000.
Certificates of deposit (CDs). You can find CDs with different terms, such as 30 days to 10 years, and you’ll generally earn a higher yield for a fixed period of time. In exchange, you typically can’t make withdrawals without incurring a penalty until the term expires.
Specialty savings accounts. If you’d like to start saving for a big-ticket item, like college, retirement and health care, specialty savings accounts can offer big tax advantages. A prominent example is a health savings account.
Cash management accounts (CMAs). Originally designed to hold cash temporarily until you invest it in stocks or bonds, CMAs are offered by brokerage firms—companies that are intermediaries between you and a securities exchange—but they’ve evolved to generally offer a great interest rate while providing abilities equal to a checking account. They typically have FDIC coverage via partner banks.
Who should get a savings account?
A savings account is a financial resource that almost everyone should have.
“We saw during the early part of the pandemic that many Americans were not prepared to go without one paycheck,” said Wesley Botto, a CFP at Hillcrest Financial Group in Cincinnati. “I think the world shutting down showed everyone the importance of having sufficient emergency savings.”
With so many fee-free options available, savings accounts are extremely accessible today. A little more than 98% of American households have some type of transaction account, such as a checking or savings account, per the Federal Reserve.
What to consider
There are several features to look for when shopping for a new savings account: minimum balance requirements, fees, yield, withdrawal limits and whether the institution is insured. Focus on federally-insured institutions with transparent fee structures. You can find FDIC-insured banks here and NCUA-insured credit unions here.
Pros and cons of a savings account
You can take advantage of the pros that a savings account offers by opening one. And you can balance out its cons by having other types of accounts.
| PROS | CONS |
|---|---|
Easy access. | Limited tax advantages. |
Federally insured up to $250,000. | Limited interest earnings. |
Low or no cost. | Limited withdrawals. |
Ability to earn interest. | Minimum balance requirements. |
Pros
Easy access. When you link a checking account, transferring funds to and from your savings account should still be convenient. If both accounts are in the same institution, the transferred funds should be immediately available. If you’re transferring cash to an account at another bank or credit union, the transfer may take three days. While you shouldn’t be in the habit of drawing down your savings, accounts are typically accessible at ATMs.
Federally insured up to $250,000. In the exceedingly rare scenario that your bank or credit union fails as an institution and closes down, your deposits in it are protected up to $250,000. No stock-market investment is protected in this way.
Low or no cost. The best savings accounts don’t charge a dime in monthly maintenance fees. You may decide, however, that $5 a month is worth it to stay with your main bank.
Ability to earn interest. Savings accounts pay you for the privilege of holding (and using) your cash. High-yield savings accounts offer particularly competitive rates.
Cons
Limited tax advantages. Other than some speciality savings accounts, most savings accounts don’t provide any tax advantages. You pay normal taxes on your income before you deposit it and then you pay income taxes on the interest you earn from your deposits.
Limited interest earnings. While you can earn interest from your savings, the yields are often lower than the earning potential you can find from investment vehicles, like stocks and bonds.
Limited withdrawals. While the Federal Reserve deleted Regulation D, which limited Americans to six withdrawals per month from their savings accounts, many financial institutions still keep that rule in their own books.
Minimum balance requirements. For accounts that have a minimum balance requirement, you must keep that amount of cash tied up in the account until you close it. If this is $5, it’s likely not a big deal. If it’s $1,000, that could be a bigger deal.
How many savings accounts should I have?
It depends on your personal preference but you should have at least one.
“The savings account [should be] used as an emergency fund,” said Donna Skeels Cygan, CFP and author of The Joy of Financial Security.
Once you have a fully-funded emergency savings account, you can grow your deposits based on other savings goals. Cygan recommended having one traditional savings account for your rainy-day fund, plus other types that offer more competitive rates, such as CDs, which can be great for when you have a specific timeline—like saving up a down payment in the next three years.
How much should I put in my savings account?
“Ideally your savings account would hold up to three to six months of all of your living expenses,” Botto said.
This way, if you lost your job, you would be comfortable for a few months while you find another. You can use this emergency savings calculator to help find your goal.
How to manage your savings account
Try to use the money only for its intended purpose.
“It is a good idea to separate your emergency savings from your household ‘operating account’ which is typically your checking account,” said Botto.
Don’t draw on your savings to pay for day-to-day things like groceries. If you made a savings account to save up for a car, have the discipline to only use it for your car.
Otherwise you might not have your savings for long.
How to open a savings account
You can apply for a savings account in person at a branch or online. You’ll need to share personal details and contact information, including your full legal name, Social Security number and residential address. Keep a government-issued photo ID handy to confirm your identity.
After providing your personal information, you’ll need to review and approve the terms and conditions before the final steps, which are to deposit the required minimum balance (if any) into the account and, potentially, connect it to another account such as your checking account.
How to close a savings account
This process depends on the specific financial institution where your savings are held. You may be able to close your account online, but you may have to make a phone call or visit a branch in person.
Be sure to transfer any remaining funds at the same time and update any automatic bill payments that are attached to the savings account you’re closing.
Frequently asked questions (FAQs)
A savings account is a good place to store your emergency fund because you can quickly transfer money to your checking account when you need it. You can also use a savings account for other short-term savings goals, like a vacation fund.
The best savings accounts for you will depend on your needs, but, generally, you want to look for one that is federally insured, has few fees and minimum deposit requirements, and offers a high yield.
Yes, most savings accounts offer at least a low interest rate. As of March 18, 2024, the national average savings rate is 0.47%, according to the FDIC — though the best accounts offer much higher rates.
The amount of interest you earn depends on the principal you saved, the interest rate offered by the bank and how long you save. For instance, a savings account with a balance of $5,000 and a 3% APY would earn a little more than $150 in interest for the year.
