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Guide to savings accounts

You work for your money, which is noble and commendable, but does your money work for you? True, there are many ways to invest your money and reap profits from it, but it all starts with saving your money. A penny saved is a penny earned. Didn’t someone tell us that? 

The most convenient and secure way to save your money is through a savings account. It’s a good thing you can easily open one at your local bank or credit union, and to their credit [pun intended], financial institutions have simplified the process of opening a new account whether you apply in person or online. However, not every savings account is perfect for you, and it’s not a good idea to open a random one without some background knowledge.  

After reading this guide to savings accounts, you’ll know how they work, and how to choose and open one that’s ideal for your financial needs. Let’s first define savings accounts, then dive into the nitty-gritty.

 

What is a savings account?

A savings account is a bank account that enables you to deposit money as you wish and pays you compounding interest. That means interest paid on the saved funds in the account and also on the interest that has been added. According to Investopedia's definition, “a savings account is an interest-bearing deposit account held at a bank or other financial institution” – a fancy way to say it’s an account that earns you a little bit of money. 

Savings accounts in a bank are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per depositor (that’s the person who owns the account). Savings accounts held in credit unions are insured by the National Credit Union Administration (NCUA) for the same amount per depositor. Basically, up to that amount, if anything were to happen to the bank or credit union, your money is safe and sound. That's what makes savings accounts a secure way to save money for short- and long-term goals. 

Checking accounts also allow people to deposit money and spend money, but there are times when one or the other might be better for you. Let’s start with what you need to know about your savings account and what it can do for you.

 

How to use your savings account 

A savings account helps you put money away to fund your future financial goals. You can use a savings account to save up for your retirement, build your emergency fund, set up a college fund, or save for a home down payment or other large purchase on your financial to-do list.  

The fact that savings accounts are backed by the federal government gives you the confidence and security to save money you cannot afford to lose. That’s why most people stash their emergency funds in a savings account. That said, you can use your savings account to hold money for any purpose, as long as you abide by the pertinent terms and conditions. Even savings accounts have a few guidelines to make them smart options.

 

 

What are the benefits of having a savings account? 

Overall, the two immediate benefits of opening and funding a savings account is securing your money and earning interest. On top of that, savings accounts make you a more disciplined saver. When you have a savings account dedicated to a particular purpose, you’re more aware psychologically and definitely more motivated to set money aside.  

Most banks package their savings accounts with additional incentives to attract more account holders. Some banks may offer you cashback points on debit cards or an opening bonus. They try to make it worth your while to give them your money to keep safe. 

Some savings accounts may enable you to save more than others, especially if you have multiple accounts. Take, for instance, a Kasasa Saver® account. It connects to your checking account and gives you rewards to increase your savings every month. 

The goal should be to increase your savings — it’s right there in the name. Finding the account that will help you reach that goal is the benefit that will make the difference in finding the right account for you.

 

How much money do you need to start a savings account?  

Most banks and credit unions require you to make a minimum opening deposit when starting a savings account. The amount varies depending on the financial institution, but the average range is from $25 to $100. Some banks may require you to maintain a minimum balance to earn the highest interest rate offered (remember, interest rates may fluctuate occasionally). You get to build on the original deposit thanks to compounding interest.   

To calculate interest on your savings account, banks multiply your account balance by the annual interest rate on offer by the time period your money sits in your account. If you don’t take out the interest earned, it also gets to earn interest. compound interest, specifically. 

A savings account gives you the flexibility and security you need to save money for future goals. Compared to other saving alternatives such as money market accounts (keep reading for more information on these accounts), savings accounts offer a straightforward way to set aside money for your future plans, given their convenient terms and conditions. You get to save money more expediently and still enjoy reasonable flexibility for fund withdrawal.

 

How a savings account works 

It’s true that the goal of having a savings account is for you to save money. But there are other ways the money you deposit works for you. When you open your savings account with a bank or credit union, they use your deposits to lend to other borrowers. The interest you earn is based on the fact that they can use your money to lend to someone else. In turn, they charge them interest as payment for the money they borrow — from you, technically. This is how financial institutions get the money to pay interest on your savings. While the interest rates may vary from bank to bank, you can expect to earn about 0.06% APY — the average national interest rate on a savings account. 

Being aware of savings account basics comes in handy when comparing different types of savings accounts, or when contrasting them with other saving methods: money market accounts, health savings accounts (HSA), or checking accounts, for example. Let’s take a look at how savings accounts differ from these other accounts. 

 

How savings accounts differ from checking accounts 

The short answer is that savings accounts keep your money set aside for future use, while checking accounts are more for moving money from place to place, day to day. The features of these accounts also determine the main differences:  

Interest returns

Most checking accounts earn little or no compound interest, while savings accounts pay you interest. This is because checking accounts are best suited for facilitating everyday transactions: spending money on your daily expenses. In contrast, savings accounts are designed to help you save and grow your money. Opening a savings account is one of the first saving tips you should consider if you want to grow your money securely. 

Withdrawal terms

Savings accounts impose limitations on money withdrawal. Most banks cap the withdrawal rate at six transactions per month, although some transactions such as ATM and branch transfers are excluded. You may not automatically get a debit card when you open a savings account. Instead, you get a routing number that you can use to send and receive funds electronically, or a mobile deposit feature to add to the balance of your savings account. Checking accounts provide unlimited access to your money, and they come with checks debit cards, and digital payment features.  

Maintenance fee and minimum balance

Most banks and credit unions will charge you a monthly maintenance fee for a checking account, while some don’t charge service fees on savings accounts. Likewise, most checking accounts have a minimum balance requirement, while some savings accounts skip this condition. It’s always best to ask for details about these features or fees before opening an account.

The ins and outs of savings accounts

How much you should put into your savings account depends on your saving goals and how much you can afford to stash away. Let’s say you decide to use your savings account for your emergency savings. In this case, you should aim to save enough money to cover six months of expenses — or the equivalent of six months of your current salary. Most banks allow you to automate the transfer of your savings from your checking account to your savings account, making it easier to hit your target faster.  

So how much money should you withdraw back out of your savings account? You’re free to make cash withdrawals or transfer your money as long as you don’t exceed the set limit per month. However, you’ll earn more interest on your savings the longer you keep it deposited in your account. It’s more profitable to keep your money in there until you really need to use it for your planned purpose. 

Ultimately, the goal of your savings account is to keep as much of it untouched as you can, and to use your checking account for everyday purchases. Gradually moving the needle from “spender” to "saver” will help you focus on the key benefits of saving your money and how the right account can help you do that.

 

How to choose the best savings account for you 

Now that we have described what a savings account is and how savings accounts work, let’s explore how to choose the saving account that serves you best. Ultimately, your choice of savings account comes down to your saving goals and how much saving account interest you want to generate from your passive income.  

There isn’t a one-size-fits-all savings account, so it’s worth understanding what options may be available to you. Not every bank or credit union will have the same type of accounts, just like interest rates can vary from place to place. Let’s highlight each type of account.

High-yield savings accounts

High-interest savings accounts are perfect if you’re looking for more interest — a higher annual percentage yield (APY) — with minimum risk. Online-only banks, or neobanks, offer the most competitive interest rates and charge fewer fees since they keep their overheads at a minimum. A high-yield savings account is particularly beneficial if you’re looking to save large sums of money for a long time, but without the risk that come with many investment accounts, and when you want more accessibility than is possible with a certificate of deposit. 

Traditional and standard savings account 

These are the typical savings accounts that every credit union and bank offer. They’re perfect if your primary purpose is to save for short- or long-term goals and you have no qualms earning lower interest rates. Standard savings accounts give you more flexibility and easy access to your money. They can connect to your existing checking account, which allows you to easily add to your savings when there are extra funds left over after your everyday spending. 

Money market accounts

If you want to enjoy the features of a savings and checking account in one package, go for a money market account. With a money market savings account, you get better interest rates than a regular savings account and more access to your money through a debit card or ATM. Typically, you are required to pay a higher minimum deposit when opening a money market account, and you may be limited on how much money, or how many times, you can withdraw from your funds.  

Online savings accounts

If you want to manage your money remotely via your phone or computer, an online saving account is the best fit. Online savings accounts usually offer higher interest rates than regular savings accounts. Both traditional financial institutions and neobanks offer online savings accounts.

Special savings accounts

Specialty savings accounts help you save for a specific goal or for a particular person. They have stringent tax and withdrawal restrictions, and you earn lower interest rates. You may find the tight withdrawal restrictions advantageous because they help you save more and reach your goal faster. These special accounts include:  

  • Health Savings Accounts (HSAs

  • Student or youth savings account

  • Roth IRAs and traditional IRA

  • 529 college savings plan

  • Custodial savings account 

  • Christmas accounts

Certificate of deposit account

Certificates of deposit (CDs) allow you to save money for a set period until the CD matures. But you’re not allowed to touch your money until then. CDs pay you a higher interest rate and don’t charge you a monthly fee. They’re a good option for saving for long-term goals, and when you don’t need to access your money sooner.  

 

Remember, you can open multiple savings accounts if one isn’t sufficient for your needs. You may open college savings accounts for your children and also hold a high-yield or money-market account. A good rule of thumb is to choose savings accounts offering you more benefits like higher interest rates, low or no monthly fees, and no monthly minimum balance requirements.  

Don’t forget that interest rates on savings accounts fluctuate from time to time as dictated by the federal funds rate. These rates are controlled by the Federal Open Market Committee(FOMC), and any financial institution will likely follow its guide when setting rates. Take this into account when choosing a savings account so that you don’t get ahead of yourself when calculating your expected returns.

 

How to open a savings account 

Opening a savings account is considerably easier today than it was twenty years ago. You can visit your bank or credit union’s local branch and open your savings account in person, or open it online. Either way, you’ll need the following documentation:  

  • Government-issued photo ID, such as a valid driver’s license, passport, or U.S. military identification car

  • Your valid Social Security number (SSN) or taxpayer identification number (TIN

  • Proof of your current address: An official document with your current physical address is enough (a recent credit card statement, cell phone bill, cable bill, or utility bill

You also need to have enough money to pay the minimum deposit as required by your bank or credit union. Most institutions allow you to deposit money electronically through wire transfer, so it’s not usually a problem satisfying the minimum initial deposit requirement if you have the money saved elsewhere. 

Like most people, you may wonder if you also have to open a checking account when you open a savings account. That depends on your preference, because it’s possible but not mandatory. For instance, you may choose to open a checking account to capitalize on automatic savings tools more frequently.

Can a minor open a savings account?  

Legally, persons under 18 can’t open a bank account without a parent or guardian, but you have two account options that you can use to save money for your kids while teaching them how to save from an early age. 

First, you may open a youth savings account. You and your child hold joint ownership of this type of account. Another option is a custodial savings account, where the money is transferred to your child once they’ve reached 18 years. 

Youth savings accounts are the most convenient option, because you’ll have fewer tax implications and you can monitor your child’s transactions. This makes saving for kids much more beneficial: You get to save money and, at the same time, teach your kids financial discipline. Teaching kids the value of saving at an early age will help them be better money managers in their adult life.

 

Make your savings account pick 

With this guide, you can pick the most appropriate savings account for your needs. Be sure you take time to review the terms of each savings account, so that you earn maximum interest and pay minimum fees. Settling for the first option you stumble across could leave you earning zero interest, or even losing money to maintenance fees and other hidden fees. Fortunately, you can always refer back to this guide to help you make the right pick. (And we know we’re biased but a Kasasa Saver account is one of the smartest and most rewarding ways to save!)

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