10 Things You Need to Know About Savings Accounts

Savings accounts are personal finance 101 -- you put money into the account, where it's kept safe for the future and you can access it anytime you need to. But don't let their simplicity fool you.

These days, you can earn 5% APY or better on your saved cash -- but you might still be limited to six withdrawals per month. A savings account can save you money on overdraft fees, but you might be charged for maintenance on the account every month.

As you can see, there's a lot to know about savings accounts. Keep reading for 10 prescient facts.

1. Savings accounts are safe

A savings account is one of the safest places to keep your cash, assuming your bank or credit union is federally insured (and most are). Banks are covered by the FDIC, while credit unions fall under the purview of the NCUA. In both instances, up to $250,000 worth of cash per account holder in an eligible account is protected. If you have a joint savings account with another person, that protection extends to $500,000. If your bank fails, your saved cash will be returned to you thanks to this insurance.

2. You can beat inflation with a high-yield savings account

As of this writing, the most recent Consumer Price Index Summary showed inflation was up 3.1% year over year from January 2023 to January 2024. Meanwhile, you can open a high-yield savings account with an annual percentage yield (APY) of 5% or higher. This means your saved cash won't lose value to inflation the way it would in your checking account or a regular savings account (some of which pay as little as 0.01% APY).

3. Some savings accounts have fees

Unfortunately, not all savings accounts are free. In some cases (and especially with brick-and-mortar banks), you'll need to maintain a certain minimum balance or jump through other hoops (like depositing a certain amount every month) to avoid a maintenance fee. Fees can eat away at your account balance, and with so many banks offering free savings accounts, you have options to avoid them altogether.

4. Automation can make them easier to fund

Some people struggle with remembering to move money from checking to savings. If this is you, automation has your back. You can set up regular automatic transfers from your checking account to your savings account, timed to when you get your paychecks or whenever works best for you. Automating your savings is a way to "pay yourself first," and moving the money as soon as it arrives in your checking account can help you avoid a situation where it's the end of the month and you weren't able to put aside any cash for future goals or emergencies.

5. Your withdrawals might be limited

While you don't have to leave the money in your savings account alone, you'll likely deal with rules about how often you can make withdrawals. A common limit is six "convenient transactions" per month (convenient transactions include debit card payments and web transfers), but some banks allow for more. This rule goes back to Regulation D, which was written and implemented by the Federal Reserve to prevent a run on banks like Americans saw during the Great Depression. Make too many transactions from your savings account, and you could face fees or account closure.

6. Interest earned is taxable

You might be earning a lot of cash from your high-yield savings account, but it's important to know that the interest payments you receive count as taxable income. At tax time, you'll receive a form 1099-INT from your bank, showing how much money you earned from interest. You'll be required to report this on your taxes and pay a portion of it to Uncle Sam. It's worth planning for, especially if you have a high savings balance and earned a lot of income from it.

7. Savings account rates aren't fixed

Unfortunately, those high rates of 5% and better we're seeing these days are not forever. Higher rates on savings accounts are due to higher interest rates across the board for financial institutions, thanks to the rate hikes implemented by the Federal Reserve to cool inflation. Rate cuts have been forecasted for 2024, and if we see the Fed lower the federal funds rate, your savings account APY will fall, too. If you want to lock in a higher rate for a period, consider opening a certificate of deposit (CD) with part of your savings.

8. A savings account is a great place for your emergency fund

Having money ready for unplanned and emergency expenses is one of the best things you can do for your finances and peace of mind. A savings account is the most natural place for this money too -- consider opening a dedicated emergency savings account and funding it automatically. This way, you'll have cash available to you and can avoid going into debt on a surprise bill.

9. Savings accounts can be entirely online

Want to avoid fees and earn a higher APY on your savings? Open an account with an online-only bank. They exist entirely on the internet, with no branches to visit -- and lower overhead costs as a result. This means they can pass the savings on to you. Getting access to cash can be a bit more complicated with online banks -- you may need to link a checking account to your savings to get an ATM card, and then transfer money there to withdraw it. Some online banks have robust fee-free ATM networks, which helps.

10. A savings account can protect you from overdrafts

A savings account can be your first-line defense against overdrafting your checking account. All you need to do is link a funded savings account to your checking, and if you accidentally overspend the balance, money will be transferred from savings to checking to cover it. It's generally free to set this up, but you may be charged a fee if you use it. This fee will likely be a lot less than the overdraft fee you'd incur without this protection, however.

Savings accounts are about as simple as bank accounts come, but as you can see, there's more to them than meets the eye. If you don't already have a savings account, what are you waiting for?