What is a Savings Account
A savings account is a relatively safe place to keep money and earn interest on money that is not necessarily needed on a regular basis.
Savings Account Basics
Unlike a checking account, money in a savings account is not meant to be used on a regular daily basis. Instead, the primary reason for a savings account is to save money, keep money safe and to get more money.
It is easy to save money in a savings account because the money is not as easy to access as money in a checking account. Checking accounts allow an unlimited amount of withdrawals by taking cash out, writing checks or using a debit card. Savings accounts usually have a limited number of withdrawals per month and checks and debit cards cannot be used with a savings account. Money that is kept in a savings account is relatively safe. However, there are two safety limitations should be noted. First, the money in a savings account is insured, but it is only insured for up to $250,000 in early 2013. Those who want to put more than $250,000 in a savings account may want to open separate accounts with different banks or credit unions, so that all of their money is insured in each account. Second, these insurance policies cover bankruptcy only, and do not cover robbery or fraud. Bank savings accounts are insured by the Federal Deposit Insurance Corporation (FDIC). Credit union savings accounts are insured by the National Credit Union Administration (NCUA). The main reason people open savings accounts is to earn more money. This is called interest. The money that is left in a savings account will grow by a small percentage. The set percentage depends on where your savings account is, but as of now, most banks pay an average interest of .01% – 1%.
Opening a Savings Account
Opening a savings account is simple and hassle-free. Many people having savings accounts at the same place they have checking accounts. Some benefits to this is 1) all your money is kept in one place 2) there may be better benefits for current customers 3) money can easily be transferred between accounts and 4) there may be protection plans for your savings to cover your checking account if you were to overdraft.
However, each bank has different interest rates and requirements. Your current bank may offer a lower interest rate and a higher monthly service fee than what you can find at another bank. If this is the case, it is ok to shop around savings account options and find the best plan for you.
Some banks will ask for an initial deposit to open a savings account and to keep a certain amount of money in your account at all times. This amount is usually only around $25. Some banks may also have a monthly service fee. This amount is usually very low and can even be avoided by keeping a certain amount of money in your account or by not withdrawing money from the account very often.
Where to Open a Savings Account
There are a few different places savings accounts can be opened. The two popular options are credit unions and banks. The amount of interest you will earn depends on where you have your savings account. Historically, credit unions generally have lower interest rates, but that may not always be the case these days. It is important to shop around to find the highest interest rates and best options for your specific needs.
Savings accounts can also be opened in online banks. Online banks are more likely to provide higher interest rates, lower service fees, and no balance minimums.
How Does the Money Grow?
One of the main business operations of banks is to give out loans. Loans are able to be given out by money that is secure in savings accounts. The interest rate of loans is slightly higher than the interest pay of savings accounts. Because of this, banks are able to stay in business off of loan interest rates, and are able to pay back into your savings account.
Some Things to Consider When Looking to Open a Savings Account
- Monthly fees and service charges
- Minimum balance requirements
- Interest rates
- Withdrawal limitations
- Physical locations in your local area
Savings Account Cons
- Can’t use a check or debit card like with a checking account
- Possible limited amount of withdrawals and access
- May have to keep a certain amount of money in the account at all times
- Possible monthly service fees
- Low interest rates, usually only around .01-1%
The Benefits of a Savings Account
- Your money will grow over time
- Your money will be relatively safe and secure against bankruptcy (not against robbery or fraud)
- Your money will be insured up to $250,000 in early 2013.
- There are less restrictions than on CD’s or other savings options
- Helps individuals save and not spend a certain amount of their money as often