What Is A Savings Account?
A savings account is a financial product offered by banks and credit unions, enabling individuals to deposit, withdraw money and earn interest. Although these accounts offer a low interest rate, their reliability and safety make them ideal for parking funds to fulfill short-term financial goals.
These accounts enable individuals to withdraw funds and meet financial emergencies without paying penalty fees. One does not need to pay a significant amount to open these accounts. However, some financial institutions may limit the number of withdrawals from such accounts. There are different savings account types, such as high-yield savings accounts and money market accounts.
Table of contents
- The savings account meaning refers to a deposit account offered by banks and credit unions that allows a person to store funds securely while earning interest on the amount deposited. This financial product can help individuals build an emergency fund.
- These accounts are of various types, like specialty savings and high-yield savings accounts. Tax is payable on the interest earned from such accounts.
- One can opt for alternatives like CDs or high-yield savings accounts if regular savings account rates are insufficient.
- A key difference between savings and checking accounts is that the latter usually do not offer interest.
Savings Account Explained
The savings account is an interest-bearing deposit account that enables individuals to save money they do not wish to spend immediately. Such an account allows one to withdraw money to fulfill any financial requirement.
Most financial institutions pay compound interest on deposits while allowing individuals to store their funds securely. That said, one must remember that financial institutions may change the savings account rates offered at any time. For example, a change in the Federal Funds Rate can cause a bank or credit union to alter its interest rates.
A bank may compound interest every month, quarter, or year. The amount earned by an individual depends on three factors — the duration for which individuals keep money in their account, the amount deposited, and the annual percentage yield or APY. After every compounding period, the financial institution transfers the accrued interest into the account.
The funds deposited into these accounts are crucial sources of funds for banks or credit unions as they utilize the money to offer loans. Some accounts may require individuals to maintain a minimum balance to earn the highest published rate or avoid paying additional charges. Hence, individuals must be aware of the requirements associated with their accounts.
Per Federal Reserve Regulation D, one could make six monthly withdrawals from their account. However, in 2021, the Federal Reserve suspended the rule indefinitely. Also, one must note the interest earned on the deposit is taxable.
One can transfer funds to and from these accounts through electronic transfers, ATMs, or mobile-based applications. Alternatively, individuals can take the offline route and transfer funds by visiting a bank’s branch.
Individuals can follow these steps to open such an account:
#1 – Compare different banks
The first thing one must do is to compare the interest rate, minimum balance requirements, and charges of different banks.
#2 – Gather the required information and documents
When opening an account, one needs to submit certain documents, for example, a driver’s license, and provide some information to the bank. The required details usually include the following:
- Social Security number
- Email Address and phone number
- Date of birth
- Residential address, etc.
Both account holders must provide the required details and documents when opening a joint account.
#3 – Open the account and fund it
Lastly, individuals must open an account they find easy to manage and deposit money.
The following are some features of a savings account:
- Deposit Checks: Individuals can deposit checks directly into a savings account if their bank provides this facility.
- Deposit Or Withdraw Funds: Account holders can deposit or withdraw funds using a mobile-based application or visit the nearest bank branch to fulfill the same purpose.
- Internal Transfers: If one has a checking account in a bank where they hold a savings account, they can instantly transfer funds to and from the accounts.
- Electronic Transfers: One can deposit or transfer funds to and from an account held with another bank using the electronic fund transfer facility.
- FDIC insured: The Federal Deposit Insurance Corporation or FDIC insures these accounts up to $250,000 per depositor for every ownership category.
Let us discuss the different savings account types in detail.
#1 – Money Market Accounts
These accounts typically offer better interest rates on deposits than regular or traditional savings accounts. Moreover, banks may allow one to write checks from such an account and access their funds using a debit or an ATM card.
#2 – High-Yield Savings Accounts
As the name suggests, such an account offers a higher-than-average annual percentage yield. These accounts are ideal for individuals seeking the best savings account rates. Typically, online banks offer such accounts, and since they have low overhead costs, they charge lower fees than traditional banks.
#3 – Regular Or Traditional Savings Accounts
These are accounts that one immediately thinks of when looking to save money securely. They offer a lower interest rate than other types of savings accounts. Individuals can open such an account with a low minimum deposit.
#4 – Specialty Savings Accounts
Such accounts aim to help individuals fulfill specific savings goals. However, sometimes they are designed for a particular type of person, like a child, instead of a savings goal.
#5 – Cash Management Account
Contrary to the other accounts in this list, a cash management account is not specifically designed for savings. Instead, it enables one to hold the cash they plan to invest in a retirement or taxable brokerage account.
#6 – Certificate Of Deposit (CD)
This is a time deposit, meaning individuals must keep their funds in the account for a certain duration. During that timeframe, the deposit earns interest, and after the maturity period is complete, individuals can withdraw their savings. The duration may range from 30 days to 5 years. However, one must note that longer terms usually come with higher interest rates.
Let us look at this savings account example to understand the concept better.
Suppose David deposited $5,000 into a regular savings account held with ABC Bank. The bank compounds interest annually and offers an APY of 0.5%. Thus, if David does not withdraw funds from the account, he will earn $25 in interest at the end of the year. This means that at the start of the next compounding period, he will have $5,025 in his account.
Advantages And Disadvantages
These accounts come with certain benefits and limitations. Let us look at them.
- Individuals can instantly access money in their accounts by using an app or visiting an ATM.
- One can grow their funds without lifting a finger by storing them in such an account. Moreover, the amount in the account will only increase, provided they do not make withdrawals.
- Individuals can pay their bills automatically monthly as banks enable their customers to set up automatic payments from such accounts. This enables one to avoid late fees or penalties.
Another key savings account advantage is that such an account is FDIC-insured.
- Some accounts may require individuals to maintain a minimum balance.
- With the low risk associated with these accounts comes low interest.
- One doesn’t get any tax benefit against the amount deposited into these accounts. Moreover, the interest earned on the deposit is taxable.
- FDIC insures deposits up to $250,000 only.
Savings Account vs Current Account vs Checking Account
Individuals must be aware of the differences between current, savings, and checking accounts to understand which one is best suited to their requirements. So let us look at the table below to know their distinct characteristics.
|It is a deposit account that usually allows individuals to carry out a limited number of transactions.
|The purpose of a checking account is to perform transactions regularly.
|Individuals can write checks from such an account. Usually, it is an individual’s go-to account for daily transactions.
|Typically, these accounts offer interest on deposits.
|Usually, current accounts do not offer any interest on deposits.
|Such accounts may or may not be interest-bearing.
|The minimum balance required for such accounts is low.
|In this case, the minimum balance required is typically lower than in savings accounts.
|Generally, savings accounts with a high APY have a higher minimum balance requirement than a checking account.
Frequently Asked Questions ( FAQs)
Individuals often assume they need only a single saving account to fulfill their requirements. However, that is not always the case. Opening multiple accounts at the same or different banks can help one manage savings goals more efficiently. Moreover, one must note that there isn’t any harm in operating more than one of these accounts as it does not affect their credit score.
Similar to checking accounts, these accounts have a routing number, which is crucial in transferring funds in and out of the account. Typically, one can find this number when they log into their bank’s online platform.
Yes, opening such an account is certainly worth it. This is because it allows one to store funds securely and earn interest on the money. That said, one must remember that these accounts come with certain limitations, for example, the minimum balance requirement, low-interest rate, etc.
Debt collectors can garnish a person’s bank accounts and wages if they have a court order.
This article has been a guide to what is Savings Account. We explain its features, types, example, advantages, disadvantages, and comparison with the current account. You may also find some useful articles here –