A savings account is a time deposit account, which earns interest on the money you deposit. Within this very broad definition, different types of time deposit accounts have different rules on how much interest you earn and how you can withdraw money.
- Types of Savings Accounts
- Benefits of a Savings Account
- Savings Account Fees
- Savings Accounts vs. Prepaid Debit Cards
- Savings Accounts and Checking Accounts
- Choosing and Opening a Savings Account
Savings accounts come in multiple varieties, but these types are broadly similar in how they work. National, local and online banks all offer their own versions of these accounts.
|Type||Typical APY||Features||Restrictions and Drawbacks|
|Regular Savings||0.01% to 0.05%||Easy and widespread access to ATMs, brick-and-mortar services||Low interest|
|Local Bank Savings||0.1% to 0.25%||Better interest rates than national banks||Services and availability limited by location|
|Online Savings||0.75% to 1.0%||Highest average interest among savings accounts and extensive online banking tools||Limited brick-and-mortar services|
|Money Market||0.04% to 0.1%||Higher average interest||Higher balance requirements|
|Certificate of Deposit (CD)||.01% to 1.65%||Fixed rate of return based on balance and term length||Penalizes withdrawals before end of term|
The Federal Reserve Board’s Regulation D allows only 6 “convenient” withdrawals from savings accounts per month. This rule places no limit on ATM and in-person withdrawals, but it does limit checks, debit cards, computer activity and preauthorized transfers, which include automatic bill pay and overdraft protection transfers.
Much like national banks, regional and local banks offer their own savings accounts, which tend to offer higher interest rates than larger institutions, but which often lack widespread accessibility and a broad range of services.
Money market accounts work the same way as regular savings. However, they do require you to deposit and maintain higher balances in exchange for earning higher interest. Falling below a minimum balance requirement can result in a reduced interest rate as well as additional fees.
CDs are a specialized case, in which your money is locked into the deposit for an agreed length of time at a fixed interest rate. The longer the term, the higher the rate you earn on your CD. Banks charge stiff penalties for withdrawing from CDs before they mature, so consider carefully how much you plan to invest in a CD, and for how long.
All of these types are also available at online-only banks, which usually offer higher APYs than their brick-and-mortar equivalents. Online banks maintain very few physical operations, and their reduced overhead is passed on in superior interest rates for customers.
Most people who open savings accounts do so in order to store and build up money for future plans or emergency needs. Savings accounts are more effective as a place to hold your money than as a place to earn interest; their relative liquidity means that banks are unwilling to pay much for money customers can easily withdraw. There are much more profitable places to invest your money if you want to maximize returns. Still, thanks to their stability and accessibility, savings accounts remain popular despite their low interest rates.
Stable and accessible: Other financial vehicles, like mutual funds, can post losses on your investment, depending on market conditions, while accounts that guarantee higher returns often come with additional restrictions on your access to funds, as with CDs. By contrast, the money you deposit in a savings account will never decrease unless you withdraw from it, and in an emergency, it will be easier to access than money placed in most other investment options.
Automatic transfers: It’s also quite easy to add to savings account balances. With automatic transfer options that let you set up a periodic deposit from another source, such as your checking account, your savings can grow over time with no extra effort from you. It’s also possible at some banks to set up multiple savings accounts, each with their own automatic transfer, so that you can create separate funds for different planned expenses, like “medical” or “summer vacation”.
Overdraft protection: When it comes time to dip into your savings, other automated tools like overdraft protection come into play. If you have your checking and savings accounts at the same bank, overdraft protection allows you to authorize automatic transfers from a savings account to cover a charge that takes your checking balance below zero. Though most banks charge for each overdraft transfer, the fee is lower than typical overdraft and nonsufficient fund fees. More importantly, overdraft protection spares you the inconvenience and potential embarrassment of a declined charge.
Like checking accounts, most savings accounts come with maintenance fees that can be waived if you meet a minimum daily balance, but in addition, many banks also waive savings account fees if you simply link your checking and savings accounts. This option is only available if you open a checking account at the same institution as your savings account.
Setting up automatic savings is another way to waive the monthly maintenance fee. By authorizing a monthly transfer into your savings account, usually at least $25, you not only grow your savings with minimal effort, you may also qualify to skip the usual savings account fee.
Banks also charge some incidental fees that incentivize minimizing your withdrawals. Since the limit for convenient withdrawals is 6 per month, most banks will charge you fees for any extra withdrawals.
Many people use prepaid debit cards as a low-fee alternative to traditional checking and savings accounts. These cards are preloaded with cash you pay up-front, and cannot be charged for more than that initial amount. They are part of one or another major credit card network, and are generally accepted at most merchants. Though prepaid debit cards are not as secure or well-regulated as regular bank accounts, major companies like American Express have begun offering their own versions, which are FDIC-insured just like checking or savings accounts. Unfortunately, the lack of regulation allows companies to impose a wide variety of fees on both loading and using prepaid debit cards.
Unbanked people who do not meet the financial or documentary requirements for opening traditional accounts often purchase prepaid debit cards instead. However, the growth of online banking, which typically requires few fees and low or no minimum balance, has made it easier to open bank accounts. While prepaid cards are useful in placing a hard limit on your spending and on the amount of money at risk if you lose your card, you should consider opening a low-cost savings account if you truly wish to avoid paying money to store your money.
There are many benefits and few barriers to maintaining both a checking and a savings account. Each account type has features which complement the other. Checking accounts can be used as an everyday “wallet” for receiving direct deposits and covering debit card transactions, while savings accounts serve as “piggy banks” to store money you don’t need immediately.
With overdraft protection, you can link checking and savings accounts at the same bank so that any deficit spending in your checking balance is covered by an emergency transfer from your savings balance. Some banks also offer more extensive services in savings accounts exclusively to customers who open higher-tier checking accounts.
When you start looking for a savings account, you should determine whether you want the highest possible interest rate or a simple, no-fee account to store some extra money. You will only obtain the higher interest rates on savings if you accept paying higher monthly fees and meeting higher minimum balance requirements. Our guide to the best savings accounts can help you get a feel for the different available options.
As with checking accounts, online-only bank services for savings accounts offer better rates than traditional institutions. Because a savings account tends to see less activity than a checking account, you may not require extensive in-person bank services, and online savings may be a good choice. Another place to look for better-than-average savings accounts are credit unions, which sometimes call them "share accounts".
Opening a savings account requires a government-issued photo ID, a social security number, proof of address, and your opening deposit, which may need to meet a minimum amount. If you plan to hold the account jointly, all account holders must have their information ready. If you happen to be under 18, you must have a parent or guardian to sign as a co-owner of the account.