Savings Account: What, Why, How & Where

Savings account is one, if not the most, basic type of bank account there is. It’s often the first bank account many of us open, but what exactly is it?

What is a savings account?

Savings account is a type of banking service that provides a consumer with a safe place to deposit their money wherein it can earn over 1% interest per year (depending on the bank). It is often used by consumers for longer-term needs, not daily expenses. Savings accounts are federally insured, unlike investment accounts.

Why do you need to have a savings account?

Compared to a checking account from which you get your paycheck and income from your employer, and spend it on daily expenses like for your electricity bill and other utilities, savings accounts are meant to store money for a later date like emergency funds or vacation funds.

Having a savings account separate from your checking account creates a distance between your expenses and savings, thus preventing you from spending too much.

Quick facts about savings accounts

1.Interest rates are not equal.

Banks have different interest rates on savings accounts, that much is commonly known to the public. However, nowadays, there is an option to open an online savings account. In comparison to brick-and-mortar banks, online banks tend to offer higher interest rates than the national interest rate average.

This is because online banks spend less by not having a physical building. No electricity bills to pay for, no lease, and most probably, fewer employees. And yet, online banks also offer longer hours and easier to contact customer service.

2.Money in savings accounts are not as easily accessible.

Compared to money in checking accounts, money deposited in savings accounts are not easily accessible. It truly is meant to save your money for the long run and grow it with interest. This type of account doesn’t usually come with a debit card, thus fulfilling its main function – helping people avoid spending their savings.

3.There is a limit to how often you can withdraw or transfer from a savings account.

Although savings accounts don’t usually come with debit cards, it’s still possible to withdraw or transfer money from it. However, federal law limits it to six times a month only. Making additional transfer typically results in a fee. However, withdrawing money through a teller or ATM is not counted.

How much should you keep in your savings account?

Again, a savings account is perfect for long-term savings. This could be your emergency fund or a lump sum for a certain interest like a trip or a big expensive item. Knowing this, it’s ideal to have three to six months’ worth of living expenses in your savings account in case of an emergency.

Consider this as your cushion. This will shelter you from a fall like losing your job or having to undergo a medical procedure. Once you’ve got your emergency fund, you can now look beyond and farther, and prepare for your retirement fund. A retirement account is riskier than a savings account, but it’s something to consider.

Alternatives to savings accounts

If you’re looking for more choices with less risk (but considerably more requirements and capital), here are a few suggestions:

1.Money market accounts
2.Certificate of deposit, and
3.Cash management accounts

These types of accounts have higher interest rates but tend to require a higher minimum balance and longer holding period or maturity period.

Where can you open a savings account?

Any bank worth their salt has a savings account, the challenge is finding the one that best suits you. Search by looking at online banks and credit unions, compare and contrast their features and pick the one that matches your needs and capabilities.

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