Saving money

What is a savings account?

A savings account is a financial product offered by a depository organization (like a bank or a credit union) where you can safely store money while at the same time earning a modest amount of interest. Savings accounts can have a variety of features, fees, and protections depending on the institution offering it. 

What is the difference between a savings account and a checking account?

The primary difference between a savings account and a checking account is that a checking account is designed for the daily use of money. Savings accounts are designed to store money for short periods of time when it is not being readily used. Checking accounts have features like debit card attachments and no limits to withdrawals or deposits. Many savings accounts have limits to how regularly a person can deposit or withdraw money. Money can usually earn more interest in savings accounts than in checking accounts.

Is it better to have a savings account or a checking account?

Savings and checking accounts have different purposes. For day-to-day use, checking accounts are always better and usually have a debit card associated with them which makes it easy to access the money. Savings accounts are better for building savings and earning interest. One of the best benefits of savings accounts is that it allows you to move money away from your monthly spending in an effort to preserve it.

Is a debit card part of a savings account or a checking account?

Debit cards are traditionally attached to checking accounts for the purpose of day-to-day Financial transactions. Savings accounts do not traditionally have a debit card associated with them.

Is it safer to have a savings account than a checking account?

Both savings accounts and checking accounts are insured to the amount of $250,000 for individuals and $500,000 for joint accounts, so savings accounts and checking accounts are equally safe. The insurance for those deposits is provided for by federal law to protect consumers from bank failures. Banks that are members of the Federal Deposit Insurance Corporation (or FDIC) and credit unions that are members of the National Credit Union Administration (NCUA) are insured. 

What is the main function of a savings account?

The main function of a savings account is the safe storage of money. It allows you to put aside money in a safe place. Savings accounts are not ideal for long-term storage of money because the interest rate earned in a savings account never exceeds the rate of inflation.

What are the features of a savings account?

Savings accounts traditionally have fairly limited features since their primary purpose is to protect money and allow the depositor to earn modest interest. For day-to-day financial transactions, it is usually better to use a checking account. 

What are good reasons for having a savings account?

There are several good reasons for having a savings account.

  1. Have a safe place to keep short-term money.
  2. Earn a modest amount of interest on your savings.
  3. Separate your savings from your spending account.
  4. Create categories in order to give your savings a purpose. 
  5. It is easy to access money in a savings account.
  6. You can start small

What fees are common in savings accounts?

Not all savings accounts are the same. Savings accounts can have different fee structures, but the following are the types of fees that savings accounts can have.

Maintenance fee

Savings account maintenance fees range from $5 to $25 dollars a month. However, most banks have ways of avoiding the fees. You can sometimes avoid fees by maintaining a minimum daily balance, holding a loan with the bank, or even linking the account to a checking account. 

ATM access fees

Accessing your savings account through ATMs can cost as much as $4 per withdrawal if you are using an ATM machine that is out of network. Some banks have extensive networks of ATMs which results in no fee charged. Other banks will reimburse a certain amount of out-of-network ATM usage per month.  

Insufficient funds fee

You can be charged up to $35 per instance when a pull from your savings account results in not having enough funds to cover the request. Savings accounts should not normally be used for day-to-day transactions, but there are times when people use ACH to pay bills directly from a savings account. 

Excess transactions

Many banks set limits to the number of transactions that can be conducted out of a savings account. A common number of limits to a savings account is 6 withdrawals a month. They may discourage actively using a savings account for daily financial management by charging $3 to $25 per excess transaction.

Wire transfer fee

Wiring money is usually done from a checking account, but it can also be done from a savings account. Usually, a bank will charge up to $25 for a domestic wire and up to $55 for an international wire.

Cashier’s check or money order

There are times when people need a paper check to make a purchase or give money. It can often cost around $5 to have a bank cut a cashier’s check.

Closing account

Some banks may charge you around $25 to close a savings account.

Paper statement fees

As a way of encouraging digital statements, banks may charge customers if they want a paper statement. Signing up to have paper statements sent to you could cost between $1 and 5 per month.

Annual inactivity fee (aka Dormant Fee)

If a savings account sits dormant, a bank may charge to induce the account holder to stay active. It might sound counterintuitive to push a customer to use an account, but the they do it to meet federal regulations associated with inactive accounts. They would like to avoid triggering the need to do that extra regulatory work, so they might charge a dormant account between $10 and 25 a month. 

Why do savings accounts have a fee?

Banks can make money through interchange fees from the merchants when a person makes a purchase using a debit card that is associated with a checking account, but savings accounts are not attached to a debit card and therefore do not generate interchange fees. 

How can I avoid the monthly maintenance fee on savings accounts?

Not all banks charge monthly maintenance fees on their savings accounts, but charging a maintenance fee is also not uncommon. Of the banks that do charge a fee on their savings account, most of them will waive the maintenance fee if the account meets one of their criteria. Common criteria for waiving maintenance fees on savings accounts include:

  • Signing up for direct deposit
  • Maintaining a minimum balance or an average daily balance
  • Have a loan with the bank (auto loan or mortgage) 
  • Hold a bank credit card

What is a minimum opening deposit for a savings account?

Each bank has their own policies for minimum deposits needed for opening a savings account, but most require between $25 and $100. Although, banks can vary by circumstance. Some banks may not require a minimum initial deposit at all and others might require a small amount to open a child’s savings account. If you are opening a second savings account tied to your primary account, there may be no minimum requirement.

What is the difference between a money order and a cashier’s check?

Money orders and cashier’s checks are forms of payment that can be obtained through a bank. Cashier’s checks can be obtained from a bank and can be for larger amounts. Money orders are much less secure and can be obtained through the post office, grocery stores, or check-cashing stores, so they tend to be for lower amounts. 

Cashier’s checks are good for making large purchases because there is no upper limit to how much can be committed to a cashier’s check. 

A cashier’s check and a money order are both forms of payment that can be used instead of cash or personal checks, but that’s where the comparisons stop. Cashier’s checks are issued by a bank, are available in higher dollar amounts, are considered more secure than money orders, and have higher fees than money orders.

What are the different types of savings accounts? 

There are a wide range of different types of savings accounts and they each have different features and purposes. They will have different advantages and disadvantages. 

Traditional savings accounts 

A traditional savings account is the most flexible and common form of savings account. It allows you to earn a little interest on your deposits and is likely to have the least restrictions on what you can do with the account. However, the interest you can earn in a traditional savings account is usually not meaningful. One of the advantages to a basic savings account is that you can open more than one of them without extra fees. This can allow you to manage your savings goals with more precision.

High-yield savings accounts (HYSA)

A high-yield savings account looks a lot like a traditional savings account but pays out a much higher interest rate on the money in the account. These accounts might have a few more restrictions like minimum account balances or withdrawal limits, or the interest paid may be dependent on the amount of money in the account. High-yield savings accounts are typically offered by online-only banks. For more detail about high-yield savings accounts, click here.

Money market accounts (MMA)

Also called a money market deposit account, a money market account is an interest bearing account that boasts a significantly higher interest payout than a traditional savings account. Money market accounts also provide some services that traditional savings accounts don’t offer, like the ability to write checks from the account or have a debit card. However, they also come with more restrictions than a traditional savings account, like a required minimum balance and restrictions on the number of transactions. For more detail about money market accounts, click here.

Certificates of deposit (CD)

A certificate of deposit (CD) is a savings product offered by a bank or credit union that offers a better annual percentage yield (APY, or interest rate you can earn) in exchange for a commitment to leave the money untouched for a period of time. The term can be between 3 months and 5 years and usually offers better rates the longer the term you select. If you need to withdraw funds before the completion of the term, you will incur an early withdrawal penalty. For more details about certificates of deposit, click here

Cash management accounts (CMA)

A cash management account is a type of account provided by a non-bank institution, like a stock brokerage or an investment advisory firm. These accounts can provide a limited set of features common to savings or checking accounts, like ATM access, online payment services, and debit cards. They can be very convenient for moving money back and forth from brokerage accounts

Typically, the non-bank institution that is holding your money sweeps the money into a participating bank at the end of every day, so you will be protected by the standard federal insurance provided by the FDIC. Therefore, deposits in cash management accounts are typically insured.

Specialty savings accounts

A specialty savings account is a catch-all category that represents a broad range of savings accounts that are tailored for specific purposes: accounts for children or minors, education savings account, or even savings accounts provided by your health benefits, like Flexible Spending Accounts (FSA) or Health Savings Accounts (HSA).

What to look for in a savings account

When assessing different savings accounts, you may want to evaluate the following things. Not all savings accounts will have all of these features, but these are generally the features that are often included in savings accounts:

  • FDIC or NCUA insurance: The most important role of a savings account is that it is a safe place to put your money. Your bank should be a member of the FDIC and your credit union should be a member of NCUA. In both cases, deposits would be insured against bank failure. 
  • Interest rate and APY (annual percentage yield): Savings accounts have long been a place where you can earn interest on your money. While most savings accounts will have very low interest rates, you may choose a high interest savings account. 
  • Initial deposit: Most savings accounts require a minimum initial deposit amount. While this may be a relatively low amount, you must be aware of this expectation. 
  • Minimum balance requirements: Some savings accounts have minimum balance requirements. However, others do not 
  • Account fees: There are a whole host of fees that banks may charge for savings accounts. Before you sign up for a savings account, you should be aware of the kinds of fees that you will be charged, how much the fees cost, and what circumstances are necessary to avoid them. 
  • Rate tiers: Usually found in high-yield savings accounts, rate tiers provide different APYs (annual percentage yields) at different savings levels. 
  • Accessibility and ease of use: Not all banks are created equal when it comes to customer service, customer experience, and convenience. As you decide which savings account you want to sign up for, you may want to be clear about what services you will want: do you need a nearby physical bank location, a robust mobile app, customer service phone number, and a usable website experience? 
  • Supplemental savings accounts: Some people value having several savings accounts where they can divide up their savings into the categories that help them monitor their progress toward their savings goals (see our article on how to save money). You should be aware of how easy additional savings accounts are to open and whether they come with additional fees or restrictions. 

What are the top features of a good savings account?

Savings accounts are rather simple things: put your money in for safe-keeping and hope to earn a little interest at the same time. Some banks provide added features to savings accounts, so it’s important to know what features are most important to your lifestyle so you can find the right bank for you. 

  • Interest rate or APY (annual percentage yield)
  • Minimum cash balance
  • ATM network
  • Online banking capability
  • Physical locations
  • Service charges

What is FDIC insurance and why is it important?

The Federal Deposit Insurance Corporation (or FDIC) is an independent agency of the United States government that protects deposits in insured-institutions from bank failure. The U. S. government set up the FDIC to avoid the impact of a bank failure on individuals. FDIC insurance only covers consumers who have deposits in a bank that is FDIC insured. 

What is the FDIC insurance limit for savings accounts?

The Federal Deposit Insurance Corporation (FDIC) is a government entity that ensures bank account balances in case of bank failures. For participating banks, the FDIC will guarantee up to “$250,000 per depositor, per bank, for each account ownership category.” Ownership categories are things like single or joint accounts, retirement accounts, revocable trust accounts, corporate accounts, etc. 

What kind of bank accounts does FDIC insurance guarantee?

FDIC insurance guarantees balances in the event of bank failure for the following types of accounts:

  • Savings accounts
  • Checking accounts
  • Negotiable order of withdrawal accounts
  • Money market accounts
  • Certificate of deposits
  • Cashier’s checks and money orders

The FDIC insurance does not cover the following types of accounts:

  • Stock or bond investments
  • Mutual funds
  • Crypto assets
  • Life insurance policies
  • Annuities
  • Municipal securities
  • Safe deposit boxes or their contents

How do you open a savings account?

Opening a savings account is easier than applying for other financial services (like applying for a loan or credit card), but you will need valid identification, proof of address, and an initial deposit if required by the bank or credit union.

What is a valid ID for opening a bank account?

  • Passport
  • Birth certificate
  • Social Security card or individual Taxpayer Identification Number
  • Government issued photo ID or drivers license

What is valid proof of address for opening a bank account?

  • Lease document
  • Mortgage document
  • Student document like a letter of acceptance to a college or university, student ID, or other proof of enrollment
  • Mortgage document

What banks don’t require ID?

All banks require valid identification for opening accounts. This is a federally regulated requirement to “know your customer” to prevent money laundering and terrorism funding. 

Should I switch savings accounts? 

Banks and credit unions know that it can be a real hassle to change your primary banking institution. You may need to change direct deposit schedules, automatic bill pay orders, learn a new mobile app, and change your habits. So, people put up with more poor customer service or expensive fees than they probably should. One way to begin the transition to a new bank is to open a savings account with the institution you would like to bank with. It helps you start the transition without having to do all the work. If you want a different banking experience and your research has led you to a particular bank or credit union, opening a savings account can be a great first step in deciding whether it’s worth making the change. 

Is it hard to switch savings accounts? 

As long as you don’t have bill pay, direct deposit, and automatic transfer setup, switching to a new savings account is relatively easy. The hardest part might be finding the new savings account you would like to have. After you do that, moving balances is relatively straightforward. You can either pull out a cashier’s check to take to the new bank or you can go the easier route of executing a bank to bank transfer. That takes only a couple of days to execute for the first time. Afterwards, each transfer should take only a day.

How to choose a savings account

The most important thing to do when you want to choose a new savings account is to determine what features are most valuable to you and your current lifestyle. Then balance that with any fees that the bank might charge for the savings account. Some savings accounts allow you to waive fees if you meet certain restrictions, like minimum balances, maintaining a checking account, or having a loan with the bank.

Can I open a bank account just for savings?

You can definitely just open a savings account with a bank, but be advised the bank may charge you a maintenance fee.

Why is a savings account important?

One of the most important reasons for having a savings account is to keep money you are trying to save away from the checking account where you conduct your day-to-day transactions. Too often, it is difficult to keep savings away from your normal spending habits if you don’t have the money set aside in a different account. 

Is it worth having a savings account?

It is definitely worth having a savings account as it is one of the most effective ways of managing your finances. If you only have a checking account it can be challenging to protect and grow a savings account because your money is all mixed in with the primary account you use for expenses and spending. In fact, many people like to have multiple savings accounts especially if there’s no associated fee with each one at the same bank. That will allow them to have a savings account for future vacations and one for holiday spending and one for the new car they’re hoping to buy. Having multiple savings accounts can be a very effective way to make progress on your savings goals.

What are the disadvantages of a savings account? What are cons of a savings account?

While there are a lot of good reasons to have a savings account there are a few disadvantages: 

Savings account earn low interest

Savings accounts traditionally do not provide much interest. In other words, money in a savings account rarely keeps pace with inflation. The longer you keep money in a savings account the less purchasing power that money will have. 

Savings accounts provide no tax benefit

While the US tax code provides a lot of benefits for things like owning homes and investing for the long term, there are currently no tax benefits for keeping money in a savings account. 

Savings accounts can have fees

Some savings accounts can charge a series of different kinds of fees. If your financial situation is such where you are constantly getting hit by these fees, maintaining the savings account may not provide much benefit. This can especially be the case if over long periods of time you can’t maintain a minimum balance and therefore incur regular monthly minimum balance fees. 

Savings accounts have a cap on deposit insurance

If you are holding a significant amount of money in a savings account you may not even be benefiting from the federal Insurance associated with sums above $250,000. In those cases the money could be better put in safe long-term Investments like bonds or higher return investments like index funds.

Are savings accounts worth it anymore?

The low interest rate offered with savings accounts can often cause people to ask whether having a savings account is even worth it anymore. However, the reality is the best thing about a savings account isn’t the interest that you can earn in the account. The best thing about a savings account and what makes it worth it is that it allows you to carve up your resources and manage them with much more granularity. By being able to keep track of different savings goals you can make faster financial progress. Savings accounts are one of the most important tools for someone who is improving their finances.

What is better than a savings account?

Depending on what you are trying to accomplish with your money, there are a lot of options that are better than a savings account. A traditional savings account probably does not provide you enough interest to make it a viable place to store your money long term. A high-yield savings account may be a much more effective option or a certificate of deposit. If you are trying to grow your money you’re better off finding conservative investment opportunities where your money can grow over time.

Is it better to have a 401k or a savings account?

When you’re just starting out on your journey of financial health, the question might come up whether it is better to start putting money into a 401k or to put money into a savings account. If your employer provides matching funds for the 401K program, you should put money into that to take advantage of the matching funds. If you don’t, you’re just leaving money on the table. 

While putting money into a 401k early can mean a great deal by the time retirement comes around, it is really important for you to have an emergency fund in case financial disruptions happen in your day-to-day life. The penalty for withdrawing funds from a 401k program to cover a financial emergency can be steep. So, it is important to maintain some sort of rainy day fund.

Should I have more than one savings account?

If you have more than one savings goal and it costs you nothing to open additional savings accounts with your current bank or credit union, it is a great idea to have more than one savings account. Establish a different account for each of your savings goals. That gives you complete visibility on the progress you’re making towards the goals that you need to accomplish.

How much money should you have in your savings account?

Having money in a savings account is a great way to protect yourself against short-term financial emergencies. However, too much money in a savings account can mean you’re missing out on the opportunity of growing that money through better investment opportunities. Savings accounts may provide interest, but banks and credit unions never provide enough interest to keep up with the cost of inflation. That means the purchasing power of your savings will drop over time. 

So, is there a rule of thumb for how much savings you should keep? You should keep enough savings to be able to overcome short-term shocks to your financial situation. Some financial advisors suggest that you hold at least 3 months worth of salary in savings in case you lose your job or some other crisis comes up. 

How much money should sit in a savings account?

The best way to assess how much savings you should have on hand is to evaluate your financial situation. If you have a lot of high fixed costs expenses every month you may need more savings at hand in case something comes up.

Does opening a savings account lower your credit score?

Banks and credit unions do not report savings accounts to the credit bureaus, so they do not show up on your credit report and will not affect your credit score. 

What age should you open a savings account?

There are two main factors to consider when thinking about when it is appropriate to open a savings account for a child: when they can begin to understand financial principles and when they have resources to “practice” with. 

Child development experts suggest that children begin to understand that money is needed to buy things as early as age 4. By age five, they are capable of understanding the idea and value of a piggy bank. The reason to start with a piggy bank is that the child sees the savings and its existence isn’t theoretical. By age 7, they have a basic understanding of money, delayed gratification, and value-exchange. By age 9, they usually have enough symbolic reasoning skills to understand money in a bank belongs to them and that they can start to understand the ways in which you manage virtual money. 

Jonathan Walker

Jonathan Walker