- A savings account is a bank-offered service that allows you to store your money while earning interest on your deposits.
- You earn interest because you're lending money to the bank, which lends it to other people and businesses.
- You'll often need to move funds out of a savings account to use your saved money.
- If you're interested in earning higher interest rates, consider alternatives to a savings account.
Definition and Example of a Savings Account
A savings account is a basic type of bank account that allows you to deposit money. You can withdraw your money from it, and most banks pay you compounding interest on the balance of these accounts. The purpose of a savings account is to provide a safe place to stash the money you're not using for regular expenditures.
Many banks, credit unions, and other financial institutions offer savings accounts in addition to other accounts. You might even find some savings accounts that offer higher interest rates than others.
How Does a Savings Account Work?
When you deposit money in a savings account, it is insured by the Federal Deposit Insurance Corporation (FDIC). If something happens to the institution that your money is in, you'll get it back—up to a certain limit.
The FDIC only insures up to $250,000 per depositor, per insured bank, per ownership category.
Most savings accounts offer compounding interest as an incentive to save money. When you deposit money, it earns interest, which is deposited back into the account. The new balance earns interest, and so on.
Using Your Account
In most circumstances, you can use your savings account to do any of the following:
- Deposit or withdraw cash: One traditional way to make deposits and withdrawals is to go to the bank and deposit or withdraw cash or use an ATM.
- Deposit checks: You can deposit checks directly into a savings account if your bank allows it. Your bank might also allow check deposits into savings via a mobile app.
- Transfer to and from checking (internal): If you have a checking account, you can move money to and from checking to savings within the same bank, often instantly.
- Electronic transfers (bank to bank): You also can make electronic deposits and withdrawals to and from a savings account from another bank.
- Direct deposit: If your employer pays by direct deposit, you can have money placed directly into the account.
- Request a check: In some situations, you might want to have your bank print a check for a large amount using funds from your savings account.
There is no limit to how much you can save in a savings account, and you can make as many deposits as you like.
The Federal Reserve used to restrict the number of savings account withdrawals to six per month as part of a rule called Federal Regulation D. The Fed paused this rule in April 2020. Unless your bank restricts it, you are free to make as many withdrawals as you need from your savings account until the Fed reinstates the rule.
Although Federal Regulation D has been paused indefinitely, banks can still set their own limits on savings accounts, so check with your bank to find out the limits.
When the rule is in effect, it's important to know that only specific types of transfers count toward it. In-person transfers, transfers by mail, or ATM withdrawals from savings would not count toward the six transfers per month rule or affect the status of the savings account.
The actions that would count toward the six-transfer limit are:
- Transferring funds to another of your accounts
- Third-party payments through pre-authorized, automatic, or telephone transfers
- Withdrawals by check, debit card, or another similar instrument to pay a third party
Most banks will send you a notice if your account is nearing a transaction limit.
To compare savings accounts, you'll want to look at the annual percentage yield (APY) paid on the account, as well as details like minimum deposit amounts, fees, and other features.
How To Get a Savings Account
Opening a savings account should take less than an hour (sometimes just a few minutes). The easiest way to open an account is to find a bank you trust and open it via an online application. If you prefer to do it in person, visit a local bank branch and talk to them about opening an account.
To open an account, at least one account holder needs to be 18 years or older. Specifics vary from bank to bank, so it helps to ask if you're opening a savings account for a minor. There are many options available, so see what your bank offers before opening an account for one of your children.
Some other aspects to consider if you're looking into savings accounts are:
- Different banks: Review and compare the interest rates, fees, and minimum balance requirements before opening an account.
- Credit unions: If you're thinking about a credit union, verify that you're eligible to join. Look for that information online, or call the credit union and ask about opening an account.
- Information you need: Make sure you have all the information you need to open an account. Examples might be government-issued identification (a driver's license, military ID, or other ID), your Social Security number, and a mailing address.
If you find yourself looking at institutions you're not familiar with, be sure that they're FDIC or NCUSIF insured (for credit unions).
How Much Does a Savings Account Cost?
While savings accounts are typically free, there are limitations and some potential costs. Accounts generally have minimum balances you're required to maintain.
Banks often charge a monthly or annual fee, or both, if you do not maintain the required minimum balance. These minimum balance fees will be withdrawn from your account. It's possible to lose money with a savings account if your balance drops to zero and your bank withdraws the maintenance fee. Then you may also owe an overdraft fee.
Credit unions don't charge fees the same way banks do. Instead, most put a hold on a specified dollar amount that you must deposit when you open your account. For instance, if the amount required is $25, you'll need to deposit that money to start your account, and you won't have access to it for as long as your account is open.
Some banks or credit unions will waive fees for a savings account if you have another account with that institution. You might be charged fees if you close your checking account while keeping the savings account because the accounts are typically bundled together.
Alternatives to Savings Accounts
While many people head to their local bank when they want to open a savings account, it's likely that the rates you'll find there will be relatively low. To get the best possible interest rate, you might consider something other than a traditional savings account.
Online Savings Accounts
Online-only accounts are a great option for higher earnings and lower fees.
The result of lower fees is that you can find many of the highest-yield savings accounts at online banks. Many online banks also allow you to get started with no minimum deposit, though some of the higher-yielding accounts require larger deposits.
Despite being online banks with no physical branches, you'll often get an ATM card for withdrawing cash. You also can transfer funds to or from your local bank or credit union electronically in about three business days. To add money, you can deposit checks with your mobile device.
Money Market Accounts
Like savings accounts, money market accounts pay interest on your deposits and limit how often you can make certain transfers. However, they typically pay more than savings accounts, and it's easier to spend your money. If you are interested in comparing accounts, you should look for accounts with the best rates.
Certificates of Deposit (CDs)
If you can commit to leaving your savings untouched for at least six months, you might be able to earn more in a CD. These accounts come with varying time commitments, and you may have to pay a penalty if you cash out early.
Some CDs are flexible, offering penalty-free early withdrawals, but the flexibility often comes with a slightly lower rate.