What is a savings account?
Why do you need a savings account?
How many types of savings account are there?
How do you open one?
What are its features?
What will it do for you and how can you get the most out of your savings accounts?
Find out the answer to these questions below.
A savings account is a great place to keep cash that you don’t plan to spend immediately.
These accounts keep your money safe and accessible while paying you interest.
Everyone needs a savings account and even though everyone’s savings needs are different, it is necessary to have one.
Whether you’re saving for a plane ticket or house down payment, or need easy access versus wanting to stow cash away untouched, it’s important that you do a little research to find a savings account that’s right for you.
A Savings Account
According to investopedia, A savings account is an interest-bearing deposit account held at a bank or other financial institution. Though these accounts typically pay a modest interest rate, their safety and reliability makes them a great option for parking cash you want available for short-term needs.
Basically, a savings account is a place where you can store cash securely while you earn some interest on your money.
Unlike investment accounts, they are federally insured, which means up to $250,000 of the money in your account would be covered if the bank failed. (1)
Why do you need a savings account?
Having a savings account can create some distance between money you spend everyday, kept in your current account, and money that’s meant for a later day, like having an emergency fund or vacation savings.
There are many benefits to having a savings account and I will show you later in the post.
Types of savings accounts
There are many types of savings accounts out there to choose from.
Each one of them has its own different features and benefits, that’s why it’s important to know and understand your options.
- Basic savings accounts
- Online savings accounts
- Money market accounts
- Certificates of deposit (CDs)
- Interest checking
- Specialty accounts (student savings and goal-oriented accounts, for example)
Basic savings accounts
A basic account is the simplest form of a savings account.
Explaining in its most simple form, it is a place to just hold your money.
And when you deposit your money in a basic saving account, you earn interest on it, and you can withdraw the money whenever you need it.
For some banks there could be some limits on how often you can withdraw your cash (up to six times per month for preauthorized withdrawals – but unlimited in person), and you can add to the account as often as you like. (2)
There’s no harm in using one of these simple accounts, in fact I have one of these, but there are other types of saving account that you should explore so you know about your options.
This is so you find the perfect fit for you.
But if you have the basic simple needs, then you can open a basic savings account at a bank you already work with and be done with it.
Online savings accounts
The features of an online bank account include:
- High interest rates on your deposits
- Low (or no) monthly fees
- No minimum balance requirements
- Leading-edge technology
These forms of accounts had been first of all available through online-only banks.
However most brick-and-mortar banks now include online capabilities like online payments of your bills and remote deposit, and some banks have online-only alternatives with decrease fees and excessive charges than their normal accounts.
Your bank probably has its capability to do online banking.
Self-service: Online savings accounts is great if you are a self-sufficient tech-savvy consumer.
You won’t have to walk into a branch and get help from a teller — you’ll do most of your banking online by yourself.
However, managing your account is easy, and you can always call customer service for help.
Fortunately, you can complete most requests yourself — when and where it’s convenient for you.
Linked accounts: To use an online account, you would normally also have a brick-and-mortar bank account (almost any checking account will do).
This is your “linked” account, and that’s typically the account you’ll use for your initial deposit.
Once your online account is up and running, you can make deposits from other sources as well.
Spending money: If there’s no physical branch, you may wonder how to spend your money if you need it quickly.
Fortunately, some online banks also offer online checking accounts that allow you to write checks, pay bills online, and use a debit card for purchases and cash withdrawals.
If you need to move the money to your local bank account, that transfer typically happens within a few business days.
Plus, some online banks allow you to order cashier’s checks that go out by mail.
Money market accounts (MMAs)
Money market accounts look and feel like a basic savings account.
The major difference is you’ll have easier access to your money.
You can usually write checks against the account, and you might even be able to spend those funds with a debit card.
However, there are limits on how many times per month you can make withdrawals.
Money market accounts often pay more than savings accounts, but they may also require larger deposits.
They are a good option for emergency savings because you have access to your cash, but you still earn interest.
Certificates of deposit (CDs)
Certificates of deposits are also similar to savings accounts (these, by the way are all variations of savings accounts).
They normally pay more.
What is the catch?
You have to leave your money in the certificate of deposit for 6 months or 18 months. It is possible to get your money early but you’ll have to pay a penalty.
This means CDs will make sense only if you don’t need the cash anytime soon.
If you really need access to your money and you still want to earn interest, you might get that from a checking/current account.
The normal checking accounts don’t pay interest, but some types of accounts allow you to earn and spend as often as you want.
Online banks offer checking accounts that pay a little bit of interest (typically less than a savings account).
Specialty accounts are goal oriented accounts and student accounts.
Goal oriented accounts
A goal oriented account is where you save money for a particular thing or goal, or sometimes nothing in particular (just leaving the money for a rainy day).
But it is advisable to earmark your money for a specific purpose.
The major benefit of this type of account is psychological. You don’t earn more money on your savings but you may reach a savings goal if the account is tied to a specific reason.
Students savings account
Some banks offer student account to students who don’t work.
This helps students avoid bank charges and fees until they start working.
If you’re a student, a student savings account at a brick-and-mortar bank or credit union is a great option for your first bank account.
Be aware that the account may convert to a “regular” account at some point, and you’ll need to be mindful of fees after that conversion.
Benefits of having a savings account
There are many reasons to have a savings account and it is wise to have one. And most of them are free – especially at online banks, community banks, and credit unions.
If you keep the money you don’t plan on using immediately in a place other than a savings account, you will be exposing your money to unsafe conditions.
It’s very tempting to spend your money if it’s in your hand.
Below are two major benefits of having a savings account;
A savings account will hold your money in a safe place (with the exceptions of bank robbery and poor management by the banks, which is usually insured).
Money outside the bank can be stolen, damaged or lost.
But when your money is insured by the government, you can put your money in the bank and rest easy that it is safe.
Savings accounts offer easy access to your money.
Once you’re ready to spend your money, you can withdraw cash or transfer funds to your checking/current account to pay by check, debit card, or an electronic funds transfer.
You can make cash withdrawals from your savings account at an ATM or with your bank’s tellers.
You are paid an interest on your savings account.
This means that your bank will make small additions to your account every month.
The interest rate added to your account will depend on the economic conditions at the time and your bank’s desire and strength to compete with other banks.
Savings account rates are generally not very high and may not even match inflation, but your risk of loss is virtually nonexistent when your funds are federally insured.
A little bit of interest is better than nothing, which typically is what you’ll get from a checking/current account.
How to open a savings account
It is easy to open a savings account and shouldn’t take more than an hour, and the account will serve you for many years.
The easiest way to open a savings account is online or with your smart phone.
But if you prefer, you can walk into any bank branch and ask to open a savings account.
- Do your research on the various banks in your country or state. Compare their interest rates, fees, minimum balance requirements and others. Some banks right now are allowing customers to open a savings account without any money. Completely free.
- If you’re considering credit unions, verify that you’re eligible to join. Look for that information online, or call the credit union and ask about opening a savings account.
- Choose the bank you wish to open your account with that meets your needs. Get an account that’s easy to use and that you’ll actually put money into, whether that means the branch is conveniently located or the mobile app makes sense to you. A slightly higher savings rate is not critical unless you’re going to make large deposits.
- Collect all the information you will need and gather the documents they’ll need from you to complete the opening of the savings account. For example, government issued identity (driver’s license, military ID etc.).
- Go to the bank and ask a customer representative that you want to open a savings account. They’ll walk you through it. Better still, you can open the savings account online if you’re tech savvy.
- Fund your new account with the initial deposit, if needed.
How to get the most out of your savings account
As soon as you’ve opened your savings account, you may realize you have a lot of questions around what to save for and how much to put away.
These will vary depending on your needs and lifestyle.
But here are a few of the most common uses to consider:
Expense Cushion/Rainy day saving
It is best to save enough to have a cushion for your basic living expenses such as rent and bills in case you suddenly lose your job or need to take extended time off for any reason.
The cushion can be anywhere from three to six months of living expenses depending on what you’re comfortable with and how much you’re able to save.
I always recommend you have at least six months of your monthly living expenses.
After this safety net is established, you can focus on saving for other needs.
Another common use for opening a savings accounts is to prepare for major life purchases like a down payment for a car or home.
You can also use your account to save for more luxurious “wants” rather than “needs,” like a vacation or a new laptop.
Remember that you’re entirely in control of when and what you spend your savings on.
Life is unpredictable — that’s why it’s always smart to have a backup plan.
Having an emergency fund can be a relief in case of a car accident or medical emergency.
Deciding how much to keep in an emergency fund depends a lot on lifestyle factors like having kids, pets, or student loans.
Account for things like these when deciding how much to put into your emergency fund.
5 Benefits of having a savings account
1. Savings accounts will usually accrue interest over time
Although interest rates have been extremely low since 2007, with many savings accounts having an interest rate below 1%, you will still accrue interest over time with an account.
That means you have more earning potential with your money compared to keeping it in a safe at home.
2. Savings accounts can provide automated bill payments
Many financial institutions allow bills to be paid automatically out of a savings account without being subjected to the withdrawal and transfer laws.
This allows you to save time because you don’t need to manually pay every bill each month and you’re less likely to experience late fees because you missed or forgot a payment.
Of course, you’ll need to have money in the account to pay the bill, but if you do, you’ll be able to maintain a better credit score over time.
3. Your funds are still readily available
With most banks and credit unions, you have online access to your funds 24 hours per day.
All you need to have is a data connection or access to the internet.
Many institutions will allow you to link your savings account to other accounts you may have, like a checking account, which can help you to avoid costly overdraw fees.
This also allows you to quickly transfer funds from one account to another, even outside of regular banking hours.
4. Your money is kept safe.
Because your money is being held by a third-party, it increases your personal safety.
Not only does storing cash on your property make you a target for potential robbery; but losses like that are not always covered by a homeowner’s or renter’s insurance policy.
If there was a fire in your home or some other natural disaster, you could lose your cash as well.
Keeping your cash in a savings account keeps you and your money safer.
5. You can open an account with very little money.
Many savings accounts can be started for just $25.
Some institutions may have an even lower limit, sometimes allowing an account to be opened for as little as $1.
This gives you an opportunity to begin saving money, even if you don’t have much to save at the start.
How to access your money from a savings account
There are many ways you can access your money from your savings account.
To use your money, you’ll often need to move funds out of a savings account.
In most cases, it’ll go to a checking account, and you can write a check, use online bill payment, or use your debit card for spending.
But there are several ways to use money from savings.
- Withdraw cash: If you want physical cash, you can get funds from an ATM. You can make unlimited withdrawals from ATMs or in person with a teller.
- Transfer to checking (internal): Moving money to a checking account in the same bank is fast and easy. Just contact customer service or make the transfer using your bank’s app or website.
- Electronic transfer (bank to bank): It’s also easy to move funds to a different bank, but the process can take several business days unless you wire the money for an additional fee.
- Request a check: In some situations, it might be easiest to have your bank print a check using funds from your savings account. For example, when making a down payment on a house, your bank can create a cashier’s check payable to a title company or seller.
Manage Your Money Better
Below are some personal finance books I recommend to help you save more money. They have helped me a lot and I'm sure they'll help you in your journey to financial freedom.
- The Compound Effect by Darren Hardy
- Total Money Makeover by Dave Ramsey
- I Will Teach You to Be Rich by Ramit Sethi
- Master Your Money (Super Bundle)
- Need an extra $2,500? Get loans up to $5000
- Are you in debt? Get free debt consultation and find a solution to your debt
- Unshakable: Your financial freedom blueprint
- The New Money Masters
- Tools to make money in tough economic times
I have read about 5 out of the 7 books and I can boldly say they have helped me handle my finances better. I believe in them because they have helped me in my financial journey and I think they’ll help you too.