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A savings account is a bank account designed to help you earn a modest rate of interest on your money without risking it on the stock market. Below, we'll look at how these accounts work in more detail and how they compare to other bank accounts.
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 at banks are FDIC insured, so you're protected up to $250,000 per person per bank in case your bank goes under. If you bank at a credit union, your deposits up to $250,000 are federally insured by the National Credit Union Administration (NCUA).
Savings accounts vary in how much interest they offer. The national average is 0.43% APY as of August 2023. Savings accounts at brick-and-mortar banks tend to give you only a small amount of interest -- but there are high-yield savings accounts with some online banks that offer 4.5% APY or more.
A higher annual percentage yield (APY) enables you to earn interest much more quickly. If you placed $1,000 in a savings account with a 0.43% APY, you'd have only earned $4.30 in interest after one year. But if that account earned 4.5% APY, you'd earn $45 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 money from your savings account, you must transfer it to a checking account and withdraw it from there via debit card, check, or a visit to a bank branch.
For many years, savings accounts were 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 fell under this rule. Deposits, in-person transactions at a bank, and ATM withdrawals (if your account offered an ATM card) didn't count toward your six monthly transactions. However, electronic transfers and automatic bill pay did count.
The Federal Reserve suspended this regulation at the start of the COVID-19 pandemic and it still hasn't reinstated it as of 2023. However, individual banks can still choose to limit how many withdrawals customers can make from their savings accounts.
You don't need a savings account, but you probably want one if you're not spending everything you earn each 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 in the future as they do today. 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 a brokerage account or put in 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 watch your monthly withdrawals and don't slip below any minimum balance requirements.
Keeping money in a separate savings account can also make it easier to keep track of your financial wellness and goals. For example, it can be difficult to monitor how much you have saved for a down payment on a house or an emergency if you keep that money in a checking account that you're also using for day-to-day expenses.
It's up to you to decide how much to keep in your savings account, but you should put at least enough in the account to avoid fees. 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 from the ongoing minimum balance requirement.
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.
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, keep as much money in the account as you're able to. That way you can take advantage of the higher APY. Don't exceed $250,000 in a single account, though. Money over this amount won't be protected under FDIC insurance and if your bank goes under, you could lose it.
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 are better than savings accounts for money you use for everyday spending. While most checking accounts don't offer interest, they also don't have limitations on how many times you can withdraw money from the account. Most of them also 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. If you get a checking account at the same bank as your savings account, you can quickly transfer funds between the two as needed.
Money market accounts are similar to savings accounts, except that money market accounts often include checks and/or debit cards. Since you can withdraw money directly from the account, a money market account could be a better fit if you want to earn a high interest rate on your savings and also access your 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 APY than you could with a savings account at the same bank.
Certificates of deposit (CDs) are another type of bank account with a high APY. The catch is you're not allowed to touch the money in a CD until the CD term ends. This can range from a month 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.
A savings account is a great place to store money you don't plan to use immediately but want to keep accessible. It's also a good place to save for a big financial goal. It gives you 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.
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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.
Here are some other questions we've answered:
Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. The Ascent's top savings account picks can earn you more than 10x the national average savings account rate.
A savings account is an account you set up at a bank or credit union that's separate from your checking account. Depending on your financial institution, you can deposit money by transferring it from a linked checking account, depositing it at an ATM or bank branch, direct deposit, or mobile check deposit. Your money will earn compound interest, usually at a higher rate than your checking account.
A good rule of thumb is to keep three to six months worth of expenses in a savings account for emergencies. For example, if your monthly bills total $3,000, you'd want to keep $9,000 to $18,000 in a savings account. If you're saving toward a big goal, like a down payment on a house or a wedding, you may want to aim higher. However, even if your savings isn't quite at the three- to six-months level, any money you have in a savings account can provide a valuable emergency cushion.
As of August 2023, the national average APY for a savings account was 0.43%, so you could expect to earn about $43 in a year on a $10,000 deposit. However, many online banks pay substantially higher interest rates. If you found an online savings account with a 4% APY, you'd earn $400 after a year.
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