What Is a Savings Account?

Kailey is an industry specialist covering bank accounts, credit cards, and all things personal finance. Her work has appeared on USA Today, CNN Money, Fox Business, and MSN Money.

A savings account is a type of bank account designed to help you earn interest on your money without risking it on the stock market. Below, I explain how these accounts work in more detail and how they compare to other types of bank accounts.

What is a savings account?

A savings account is a common account type offered by banks and credit unions. Money you put into these accounts accrues interest, unlike most checking account funds, so you can grow the value of your savings over time. Like checking accounts, savings accounts are FDIC-insured, so you're protected up to $250,000 per person per bank in case your bank goes under.

Savings accounts vary in how much interest they offer. Savings accounts at brick-and-mortar banks tend to give you only a modest amount of interest -- the national average is currently 0.07% APY. But there are high-yield savings accounts with some online banks that offer close to 2% APY. A higher APY enables you to earn interest much more quickly. If you placed $1,000 in a savings account with a 0.07% APY, you'd have only earned $0.70 in interest after one year. But if that account earned 1.70% APY, you'd earn $17 after one year.

Most savings accounts don't allow you to withdraw money directly, though a few banks do offer ATM cards. Usually, if you'd like to get money from your savings account, you must transfer it to a checking account and withdraw it from there via debit card or check or visit a bank branch and request the funds.

Savings accounts are governed by Regulation D. This is a federal law that prevents you from making more than six withdrawals or transfers out of your savings account in a month. Not all transactions fall under this rule. Deposits, in-person transactions at a bank, and ATM withdrawals, if your account offers an ATM card, don't count toward your six monthly transactions. Electronic transfers and automatic bill pay, however, do.

Why do you need a savings account?

You don't need a savings account, but you probably want one unless you spend everything you earn every month. Savings accounts enable you to earn a much higher interest rate on your money than checking accounts, most of which don't offer any interest at all.

If you leave your extra cash in a checking account, you're essentially guaranteeing that it's going to lose value over time. This is because inflation will drive up living expenses and your checking account funds won't go as far as they once did. Savings account interest rates may not keep up with inflation, but they can still help you earn a little bit, so your money isn't just sitting there.

Savings accounts also keep your money accessible, so you can withdraw it fairly quickly, unlike money you invest in the stock market or put in another type of bank account like a certificate of deposit (CD). If you invest money and then an unexpected expense arises, you might have no choice but to withdraw your funds and take a loss. With a savings account, you won't have to worry about losing money as long as you limit yourself to six withdrawals per month and don't slip below any minimum balance requirements.

How much should you keep in savings?

Some savings accounts require you to keep a certain amount of money in your account in order to avoid a monthly maintenance fee. There might also be an opening deposit requirement, which could be different than the ongoing minimum balance. You should plan to keep at least this much money in your savings account, so you don't have to worry about losing money to fees over time.

Some savings accounts have a tiered APY system where you earn a higher interest rate for keeping more money in your savings account. If the account you're interested in is set up this way, you may want to keep as much money in the account as you're able to. That way you can take advantage of the higher APY. You should never exceed $250,000 in a single account, though, because money over this amount won't be protected under FDIC insurance and if your bank goes under, you could lose it.

A savings account is also a good place for your emergency fund and money you plan to use in the next three to five years. You'll have the money at your fingertips and you'll earn a modest amount of interest without the near-term risks that come with stock market investments.

Alternatives to savings accounts

Savings accounts have their place, but they're not right in every situation. Here are a few other bank accounts you may want to consider.

Checking accounts

Checking accounts are a better fit than savings accounts for money you use for everyday spending. While most checking accounts don't offer interest, they also don't impose limitations on how many times you can withdraw money from the account. Most of them give you a debit card and checks so you can withdraw money directly at a moment's notice.

Checking accounts are widely available at banks and credit unions as well, and if you get a checking account at the same bank as your savings account, you can quickly transfer funds between the two when you need to withdraw money from your savings account.

Money market accounts

Money market accounts are similar to savings accounts, except that money market accounts often include checks and debit cards. The ability to withdraw money directly from the account could make it a better fit for those who want to earn a high interest rate on their savings and also access their money more easily.

Money market accounts typically require a higher minimum balance than savings accounts -- in some cases, you may need a four- or five-figure sum to open one of these accounts and earn the advertised interest rate. So a savings account is definitely a better fit if you don't have a lot of money to deposit. But if you can afford a money market account, you might be able to earn a higher interest rate than you could with a savings account at the same bank.

Certificates of deposit (CDs)

Certificates of deposit (CDs) are another type of bank account with a high interest rate. The catch is you're not allowed to touch the money in a CD until the CD term ends. This can range from three months to over five years, depending on the CD you choose. If you withdraw your money before this date, you will pay a penalty equivalent to one or more months of interest.

CD rates can be higher than high-yield savings account interest rates, but these accounts are only a good fit if you won't withdraw money before the end of the CD term. If you think you may have to, a savings account is a better fit.

Is a savings account right for you?

A savings account is a great place to store money you don't plan to use immediately but want to keep accessible in case of emergencies. It's also a good way to save towards a big financial goal. It's a safe way to earn interest and you won't have to worry about losing money as long as you avoid monthly fees and limit your monthly withdrawals.

If you don't think a savings account is the right home for your money, consider a checking account, a money market account, or a CD instead. These accounts are all widely available at banks and credit unions, so it shouldn't be too difficult to find one that suits you.

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