A savings account is an Interest-Deposit Account at a financial institution. These accounts are safe and secure for holding money for short periods of time, but the interest rate paid on them is low.
Savings accounts have flexible terms and are suitable for accumulating funds for short-term purposes (vacations, a car), keeping excess money in a bank account to earn interest, and creating an emergency fund. But they have some restrictions on the frequency of withdrawals.
How does Savings Account work
Savings accounts can be opened at a bank or credit union and a person can put money in it and the bank will pay interest on the balance. Also, people can continue adding money to savings. The interest rate and the corresponding APY (annual percentage yield) can be different depending on a bank and an account. The APY is the interest rate charged on your savings, including a compound interest.
The higher the APY, the more you invest. The longer you save, the more your money can grow over time. You can use a savings calculator to calculate your potential savings. For example, a person opens a savings account with $1,000 and deposits $100 a month into the account. The bank pays an APY of 1.00%, so one year later, the balance will be $2,217 - $2,200 of the deposits adding $17 of interest. Savings account rates matter when choosing a bank and an account to open. Some online financial institutions have several times the national average rate for savings accounts.
Types of Savings Accounts
The type of savings account depends on the bank and the personal needs. The main types of savings accounts are listed below.
Standard (traditional) savings accounts. This is the most common savings type. They can be opened at any financial institution (a bank, a credit union).
This type of account usually has low interest rates. According to the FDIC as of May 16, 2022, the national average interest rate for savings accounts is 0.07% APY. These accounts may be subject to a monthly commission or minimum balance fee. These accounts are for basic savings.
High-yield savings accounts. This type offers an above-average APY when looking for the best savings account rate. Traditional financial institutions may offer high-yield savings accounts. But it's easier to discover a high-yield savings account with lower fees at
online banks, because of less overhead expenses.
Money market accounts. This is a combination of savings account features and checking account features. You can earn interest on your balance, write checks, or withdraw money and buy things with a debit card.
Money market accounts may have higher rates than standard savings accounts, but there may be a six-withdrawal rule per month. A person can choose a money market account to get more convenient access to his or her savings.
Savings accounts for children and students. There are special children's savings accounts for children and students. These accounts have an age requirement for savings. For example, student accounts can be opened only if the person is 25 years old or older.
Such accounts are opened more often at traditional banks rather than online banks to help children, teenagers, and students learn how to save.
The rates of such accounts are not aimed at competing with high-yield savings accounts. But they still have the potential to generate some income while teaching kids how to save.
Specialized Savings Accounts. Some banks offer single purpose savings accounts. These accounts are not as popular as other types of savings and can sometimes have limitations. For example, a savings account just for Christmas savings is possible, but it is allowed to withdraw money only once a year in November before the holiday shopping season. A down payment savings account may have a matching savings bonus, but only in case of getting a mortgage loan from the bank where the account is opened. Educational savings accounts are designed to help you save for college education.
How to open Savings Account
Person can apply to open a savings account online or in person, visiting a bank or a credit union department. There is an application form to fill in. When filling the savings account application, a person will need to give the bank information about name, date of birth, address, SSN (Social Security Number), phone number and email address.
If a person is opening a joint account, he or she will need to provide the same information for your joint account holder. Then a person can tell the bank how much he or she wants to deposit into a new savings account. If a person is applying online, he or she will need to share the bank account number and routing number for the account they’re using to transfer the initial deposit.
The bank may ask for verification of the savings account by making two small test deposits. In general, an online process of the savings account opening is relatively quick and convenient.