How Does a Savings Account Work?

A bank employee explains bank services to a customer.
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A savings account is a type of bank account designed for two purposes: keeping your money safe and helping your savings grow through interest payments. While savings accounts don’t offer the easy access through a debit card that checking accounts provide, they’re perfect for something like an emergency fund or a medium-term savings goal.

Learn how savings accounts work, when you should open one, when you should make withdrawals, how they can help you reach financial goals, and what the bank does with your money in the interim.

Key Takeaways

  • Savings accounts are safe places to store your money and are eligible for FDIC insurance.
  • Most banks pay interest on the balance of your savings account.
  • Banks use the money in your savings account to finance their other activities, such as lending.

How To Open a Savings Account

Opening a savings account isn’t too difficult, but there are a few steps you need to follow.

Pick the Right Savings Account

The first step in opening a savings account is making sure you choose the right account for your needs. Almost every bank offers a savings account, and you’ll have a lot of options to choose from. You also have to decide whether you want a savings account from your local bank, a credit union, an online bank, or some other entity, such as an investment broker.

To get started, consider why you’re opening the account. If it’s for an emergency fund, you might prefer a local institution so you can easily get cash when you need it. If you’re saving for a goal, an online account might be a good fit.

Compare each account’s fee structure, minimum deposit requirements, and interest rates to find the best option.

Gather Required Documents 

To open a bank account, whether you’re doing it in person or online, you’ll need a few documents. Most important are a form of identification such as a government-issued ID or a birth certificate, and proof of address such as utility bills in your name.

Have these documents handy when you go to open the account.

Apply and Fund the Account

Once you’ve chosen a bank account and have your documents ready, you can fill out an application. While it’s unusual, banks can choose to deny your application for a bank account, so you need to wait for approval.

Usually, approval is instant and you can make your opening deposit. If you’re at a physical location, that’s as simple as handing over the cash. Otherwise, you can make an electronic transfer from an existing account or debit card.

Download the Bank’s App

Once your new account is open, it’s a good idea to download the bank’s app. Most banks and even smaller credit unions these days have apps that make it easy to manage your account and view your balance while on the go.

Finishing Touches

Opening and funding a savings account is the first step, but if you’re trying to build up savings, there are some other things to think about.

One easy way to save is to set up direct deposit or automatic transfers to your new savings account. If you’re moving your savings from one bank to another, make sure your old account isn’t tied to any automated transactions, then close it out.

What the Bank Does With Your Money

When you deposit money to your savings account, it’s easy to imagine the bank sticking it in a big vault and just letting it sit there. If that were the case, banks wouldn’t make much money and they wouldn’t be able to pay interest on savings balances.

Instead, banks use the money in your savings account for other purposes. For example, banks can fund some of the loans they offer, such as mortgages or auto loans, out of the savings that other customers deposit.

In short, banks use your money to issue loans, collect interest from those loans, and pass a portion of that interest on to you.

This may sound scary because the bank is putting your money at risk. However, bank account balances are insured by the government.

FDIC Insurance Coverage

The Federal Deposit Insurance Corporation (FDIC) is a government organization designed to protect consumers and their bank accounts. It provides insurance to banks, offering to reimburse bank account holders in the event that a bank closes and is unable to return customer deposits.

For example, imagine that you opened a savings account at XYZ Bank and deposited $5,000. If XYZ Bank goes bankrupt, the FDIC will reimburse you for the $5,000 lost. Because the FDIC is backed by the U.S. government, savings accounts are all but guaranteed to be safe places to store your money.

FDIC insurance covers up to $250,000 per depositor, per bank, per ownership category. Ownership categories include single accounts, joint accounts, trust accounts, retirement accounts, and the like.

For most people, that means $250,000 in coverage for your checking and savings account combined at a single bank, and double that if you hold the accounts jointly.

Keep in mind that the limit applies per bank. If you have more than $250,000 to deposit, you can split the balance across multiple banks and get up to $250,000 in coverage at each.

Some cash management accounts will handle this for you, splitting your funds across four or more banks to provide $1 million or more in FDIC insurance while saving you the hassle of interacting with multiple banks directly.

Maximizing Savings Account Interest Payments

One reason to open a savings account is to earn interest on your balance. Interest payments increase the balance of your account, helping your savings grow.

Most banks will publish the annual percentage yield (APY) offered by their savings accounts. APY accounts for the interest rate and the compounding schedule to tell you how much you’d earn in a year if you didn’t add or remove funds from the account.

For example, if you put $1,000 in an account with a 1% APY and do nothing else, you’ll have $1,010 (1% more) a year later.

Note

You’ll earn more interest if you add more money to your savings account and less if you make withdrawals. Banks are also free to change their interest rates over time.

In general, online banks tend to offer the best interest rates on savings accounts. You might also be able to earn higher rates with larger deposits, so look for online or high-yield savings accounts if earning interest is your goal.

Savings Account Costs and Fees

Savings accounts are meant to keep your money safe, but banks often charge fees that can eat away at your interest earnings and even your balance. Understanding these fees and how to avoid them can help you keep your money and grow it over time.

Minimum Deposit Requirement

While not quite a fee, you do have to pay attention to a savings account’s minimum deposit requirement. You must deposit at least this much in order to open the account.

Some banks have no minimum opening deposit, but others might require you deposit $100 or more to initially open the account.

Monthly Fee

Banks commonly charge a monthly fee to keep a savings account open. These fees can range in amount. There are also many fee-free accounts out there.

Note

Most banks offer opportunities to dodge savings account fees. For example, you might be able to avoid the fee by maintaining a minimum balance over the course of the month or by receiving regular automatic deposits.

ATM Fees

Some banks will let you access your savings account using a debit card, especially if you also have a checking account at the bank. You may have to pay fees related to using an ATM.

Excess Transaction Fees

There can be limits on how many withdrawals you make from a savings account in a single statement period.

Historically, this was limited to six electronic withdrawals in a statement period, but this limit was lifted during the COVID-19 pandemic when the Federal Reserve also set the banks’ reserve requirement to zero. However, banks may still choose to impose a limit or fee, and the government-mandated limit may return in the future.

When To Withdraw From Savings Accounts

Savings accounts are meant for saving, but there comes a time when you’ll have to make a withdrawal. Knowing when a withdrawal makes sense is important.

Of course, if you’re saving for a particular goal, such as a vacation or an expensive purchase, you can withdraw funds when you reach your goal.

If your savings account is holding your emergency fund, it can be harder to decide. If you find yourself facing an unexpected bill or expense, then you might want to tap your savings account to pay for it. That’s especially true if the alternative is something like putting it on your credit card and carrying a balance.

If you do wind up withdrawing from your savings account, replenish your savings over time. Try to set up automatic transfers to add a bit of money to the account each paycheck until you’ve replaced what you withdrew.

Frequently Asked Questions (FAQs)

What is the difference between a checking and a savings account?

Checking and savings accounts are both bank accounts, but checking accounts are intended for everyday spending, while savings accounts are designed to hold your money for the medium to long term.

How much money should I keep in my savings account?

If you’re using your savings account to hold an emergency fund, a common rule of thumb is to hold between three and six months’ expenses.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Chase. “What Do You Need To Open a Bank Account?

  2. Capital One. “Adding Money to Your Account.”

  3. Capital One. “Why Do Banks Pay Interest?

  4. FDIC. “Deposit Insurance.”

  5. FDIC. “Are My Deposit Accounts Insured by the FDIC?

  6. FINRA. “Types of Investments: Savings Accounts.”

  7. Federal Register. “Reserve Requirements of Depository Institutions.”

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