A savings account is a type of deposit account that allows you to save money and earn interest on your balance. This is different from a checking account, which allows you to write checks, but you may not earn interest on your balance.
Savings accounts are ideal for saving money for special reasons and objectives. You might establish a savings account to hold your emergency fund, or you could set up a down payment savings account before purchasing a house.
Most savings accounts have a few restrictions, such as a minimum balance requirement or a limit on the number of withdrawals you can make each month. However, these accounts are still relatively easy to use and can be a good option for people who want to save money for future needs.
How Do Savings Accounts Work?
Savings accounts are quite simple to understand. You open a savings account at a bank or credit union and deposit funds into it. The bank then pays you interest on your balance. You may continue adding money to a savings account in most cases, usually via one of these methods:
- Cash or check deposits at the ATM
- Cash or check deposits at a branch
- ACH transfers from a linked bank account
- Mobile check deposit
- Direct deposit
The interest rate you earn and the corresponding annual percentage yield, or APY, can vary from bank to bank and account to account. The APY is the rate of return on your savings when compound interest is considered. So, consider this scenario: You open a savings account with $500. You put $100 monthly into the account. The bank’s APY is 2.00 percent, so you end up with $ 4,244.08 after three years. The more money you put into your account and the longer you save, the more your assets will increase over time as long as your APY is greater than zero percent.
Benefits Of Opening A Savings Account
Savings accounts are typically used for financial goals, such as saving for college expenses or buying a home. Benefits of opening a savings account include:
You Can Earn Interest On Your Deposited Funds.
When you keep money in a savings account, you earn interest on that sum. The APY is determined by the bank, and it may change over time based on the Federal Reserve’s target rate, which impacts the rates offered by financial institutions. Nevertheless, if you need to park cash somewhere and want to earn interest on it, a savings account is a good option.
Your Deposits Are Federally Insured.
The Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA) protects your money up to $250,000 per depositor per institution in case the bank or credit union fails.
You Can Access Your Money Easily.
While it may take a few days for funds to become available after you deposit them, you can access savings account funds much more quickly than you could with investments like stocks and bonds. In other words, a savings account is much more liquid than other types of assets.
A Savings Account Can Help You Save Money Consistently.
If you set up automatic transfers from your checking account to your savings account each month, you’ll find it easier to sock away cash consistently. This disciplined approach to saving can help you reach financial goals like buying a car or taking a dream vacation.
A Savings Account Keeps Your Money Safe From Yourself.
It’s not always easy to resist the urge to spend money when it’s sitting in your checking account and available via ATM withdrawals or debit card purchases. When you have a savings account, however, you may be less tempted to spend impulsively because it’s not as easy to access your cash. Having a savings account may assist you in avoiding spending money intended for a specific purpose. Keeping all of your money in a checking account, for example, might make it simpler to spend money you intend to save.
A clever way to protect yourself from making ill-advised withdrawals from savings accounts is to set up savings accounts that are not linked to easy withdrawal methods like ATMs or Venmo. We call this a speed bump, and it is a highly effective way to limit unplanned behaviors.
It Can Help With Financial Emergencies
Even if you don’t have a specific savings target in mind, having a bank account can still make sense. Having money in the bank might make it simpler to pay your bills and basic costs in an emergency—if you lose your job or your car breaks down, for example. This method allows you to avoid taking out a high-interest loan in an emergency. You may also continue growing your money without having to worry about accumulating debt as long as you don’t need to utilize your savings for an emergency. Emergency savings accounts should not be linked to easy withdrawal methods. Emergency funds should only be used for real emergencies, and a speedbump will help you to maintain discipline.
If you’re interested in learning more about emergency funds, check out our article – Emergency Funds: Why To Have One And How To Build It.
It Can Keep Your Cash Safe
Keeping your money in a savings account also offers some security. If you keep cash at home, for example, it may be stolen. Wearing a wallet full of cash puts you at risk of robbery or loss. However, when your funds are kept in a bank insured by the FDIC or NCUA, they are protected up to the total coverage limit.
Types Of Savings Accounts
Now that we’ve covered some of the general benefits of savings accounts, let’s look at several types available, each with its own set of features and benefits depending on your needs. Here’s a quick rundown of some of the most popular options:
Standard Savings Accounts
A standard savings account is a basic deposit account that offers features like check-writing privileges, an ATM/debit card, and online banking capabilities. Many standard savings accounts also come with monthly service fees, but these can sometimes be waived if you maintain a minimum balance. This is the most basic type of savings account and usually offers low-interest rates. However, it can still be a good option if you’re just starting out and don’t have a lot of money to save.
Your cash accounts are protected up to $250,000 per depositor, per account ownership category if they are insured by the Federal Deposit Insurance Corporation (FDIC). Similar insurance is available for federally chartered and most state-chartered credit unions through the National Credit Union Administration (NCUA).
Money Market Accounts
A money market account is a type of savings account that typically offers higher interest rates, but it requires higher minimum balance requirements. Money market accounts also usually come with check-writing privileges and ATM/debit cards, but there may be a limit on the number of transactions you can make each month. If you have a larger sum of money to save and can maintain the account’s minimum balance, a money market account could be a good option for you. There may be some restrictions on how you can use the money.
A money market account (MMA) is a type of savings account that combines characteristics of a regular checking account with those of a basic savings account. These accounts are available at brick-and-mortar banks, online banks, and credit unions.
Rates are higher than in traditional savings accounts, and some even provide rates comparable to high-yield savings accounts.
Certificate Of Deposit
A certificate of deposit (CD) is a type of savings account where you agree to keep your money in the account for a set period of time, usually at least six months. In exchange, you’ll usually earn a higher interest rate. CDs have terms ranging from a few months to several years, and the longer the term, the higher the interest rate is likely to be. When the term is up, you can withdraw your money or reinvest it in a new CD. A CD is good for people who want to earn higher yields but don’t need to access your funds right away. Unfortunately, most banks impose an early withdrawal penalty on any money withdrawn prior to the maturity date. A CD ladder of several CDs with various maturities can help to circumvent this problem. For example, buy one CD every quarter so that a CD is maturing each quarter. This provides available cash on a quarterly basis.
High-Yield Savings Account
As the name suggests, these accounts offer higher interest rates than traditional savings accounts. This can help you earn more on your money over time, but they usually require a higher minimum balance. Many also have monthly service fees, so be sure to read the account details carefully before you open one. This is one of the most effective types of accounts to increase the amount of money in your savings account. High-yield savings accounts are FDIC or NCUA protected in the same way as traditional savings accounts. Online banks have lower costs, including monthly maintenance and excess withdrawal fees, than their brick-and-mortar counterparts.
Specialty Savings Account
There are a few distinct types of specialty savings accounts, such as those designed for students. These accounts can offer special benefits, such as higher interest rates or waived fees. Savings accounts that are designed to help you achieve certain savings objectives rather than being a catch-all for the money you don’t intend to spend are known as specialty savings accounts. You can also set up various sorts of education savings accounts, such as 529 college savings accounts and Coverdell Savings Accounts. These two types of tax-advantaged college savings accounts allow you to save money for higher education expenses in a way that is beneficial to the IRS. There are many distinct kinds of retirement savings accounts accessible to you, including Traditional and Roth Individual Retirement Accounts (IRAs) and IRA CDs. If you have a specific goal in mind for your savings, opening one or more specialty savings accounts may be appropriate. Just bear in mind that there might be limitations on when and how you can withdraw those funds later.
What Is The Best Type Of Savings Account For You?
The best type of savings account for you will depend on your specific goals and needs. If you’re just starting out, a standard savings account could be a good option. But if you have more money to save and can meet the minimum balance requirements, a money market or high-yield savings account could be a better choice. Remember, there’s no one-size-fits-all answer when it comes to choosing a savings account. The best account for you will depend on your unique financial situation and goals. Talk to your bank or financial advisor to learn more about the distinct types of savings accounts and which might be right for you.
As a college student you may want to check out an online bank for easy banking, high interest rates, and low fee structures. Here are a couple we recommend.
Quontic Bank
Quontic Bank offers a number of advantages to international students, including online access and removing common bank fees such as overdraft fees. Additionally, they offer high-interest returns in both their checking and savings accounts, to help your money grow.
High Yield Savings
Similar to their high-interest checking accounts, Quontic offers a 3-minute fast setup and low $100 minimum deposits for high-yield savings accounts with high yields of 4.25%.
Key Features:
- Earn 4.25% APY with a Quontic High Yield Savings Account
- Start earning interest from Day 1 of your first deposit with no limit on how much you can earn.
- Open an account online in just 3 minutes
- Interest is compounded daily and credited to your account every month
Similar to other banks, Quontic sets a limit of 6 withdrawals per statement cycle.
For this reason, we recommend you have a savings account to store the majority of your money, and move what you need for the month over to a checking account once or twice a month to spend it.
Axos Bank
Another online banking option is Axos Bank, which Forbes calls “one of the top online banks.” With quality savings and checking account services, Axos is a great option for international students to get started in the US. Axos offers multiple tiers of checking and savings accounts. Each option is tailored to specific needs. Here are our top recommendations for you.
High Yield Savings
A High Yield Savings account is a great account for college students, featuring a high APY and a bank card.
Key Features:
- Earn up to 0.61% APY*
- Free ATM card upon request
- Suite of digital money management tools
- No maintenance fees
- No monthly minimum balance requirements
- $250 minimum balance to open an account
How To Open A Savings Account
Savings accounts are simple to open. You can open an account at most banks and credit unions, and you’ll typically need to deposit a minimum amount of money to get started. If you’re interested in opening a savings account, there are a few things you should know about how they work.
Gather Your Identification
For the application, you will need to provide your Social Security number (or tax ID number) and other personal information from a valid government-issued identification, such as a driver’s license or passport number. Expect to provide your first and last name, home address, as well as your phone number.
Select A Single Or Joint Account
If you are opening the account yourself or with someone else, let them know. You’ll need the information from earlier steps for anyone else whose name will be on the account.
Accept The Terms And Conditions
This is when the bank requests your confirmation that you’ve read the disclosure material relating to costs, liabilities, and how account interest is calculated. Ideally, you’ve chosen an account that pays high rates and has little or no monthly service charges. This is your opportunity to double-check things.
Choose Your Deposit Amount
If you’re transferring money between accounts online or over the phone, simply provide the routing and account numbers from a current bank account. A routing number is the bank identification number. If you’re creating an account in person, give a check or cash to the bank representative.
Submit Your Application
You may get a response within minutes when you apply online, but it might take between two and five business days for the bank to validate your information, establish the account, and grant you access.
You can also open an account, make direct deposits, and set up automatic transfers from checking to savings once your account is active. Making regular savings payments may help you increase your bank balance with minimal additional effort
Now that you know all about savings accounts you may want to explore checking accounts, check out our article – What Is A Checking Account And How Does It Work?
