What is a Savings account?
A savings account is a bank account that allows you to deposit money you don’t plan to spend immediately while giving you a modest amount of interest on your account’s balance. A savings account serves the purpose of storing your money during rainy days. In addition, these accounts are insured for up to $250,000 per account owner so that you won’t lose your money.
Savings accounts are different from checking accounts; they help you curb unnecessary spending and stash money away to make long-term goals achievable. It is a perfect deposit account to store an emergency fund and save for short-term goals like vacation, buying a car, or home improvement.
How does the Savings account work?
You can open a savings account at credit unions and banks. Opening an account in these accounts is not so complicated. After opening a savings account, you’ll provide the personal information to your financial institution and deposit the money into the account. You can open an account online or in person. Federal Deposit Insurance Corporation (FDIC) insures savings and other deposit accounts. So, if something happens to the bank where your savings account is, you’ll get the money back up to the particular limit.
Furthermore, once you’ve deposited the money into your account, the bank will start paying interest on your balance. The interest rate you earn and APY varies from bank to bank, and your bank will choose to pay interest daily, monthly, or yearly. Your interest will get deposited in your account after the end of each compounding period.
Moreover, you can transfer money into your savings account by mobile deposit, direct deposit, cash deposit at ATM or branch, Wire transfers, and ACH (Automated Clearing House) transfers from a linked bank account.
There is no deposit or saving limit in a savings account. But after Federal Regulation D limits the withdrawal to six times, many banks follow this rule. If you exceed your limit, you’ll likely be charged a fee, or the bank will close your account or convert savings into a checking account. You can check out with your banks to find the withdrawal limits.
Savings accounts come with some advantages and disadvantages, just like all financial products. Read on to find the pros and cons of a savings account.
Advantages of savings account
Let’s take a look at the benefits of a savings account first.
Safety
A savings account gives you a safe place to save your money for a rainy day to achieve a big or short savings goal. FDIC insures your money in a savings account for up to $250,000. It means it’ll keep your money safe compared to the cash under your mattress. So, it offers a safe &'' consistent rate of return with no risk.
Growth
Beyond keeping your money safe, a savings account allows you to earn interest on your balance without doing anything. Your money will grow over time depending on your interest rate with regular returns. Moreover, the interest is taxable income, so you’ll need to pay the tax on savings account interests.
Liquidity
These accounts offer more liquidity. They allow you to do up to six monthly withdrawals or transfers without penalty, unlike certificates of deposits (CDs), which charge a penalty if you withdraw your funds too soon before it matures.
Ease of Use
Lastly, a savings account is simple and easy to use. Transfers between checking and savings accounts at the same bank are quick and straightforward. You can instantly transfer excess money from checking to a savings account and earn interest.
Disadvantages of Savings account
Here are the disadvantages of a savings account:
Low-interest rates
The main downside is that it won’t pay as much as other financial products. For example, CDs or treasury bills give high returns, and the interest rates on savings accounts are low, usually around 1 to 2 %.
Accessibility Restrictions
While liquidity is the key benefit of a savings account, it can be a drawback. There are accessibility restrictions as the Federal Reserve limits the withdrawals up to six per statement cycle. Therefore, it is not a good choice for the money you need to access frequently.
Minimum balance requirement
Some financial institutions require a minimum balance to open and maintain your savings account. Meanwhile, some banks or credit unions don’t charge any fee to open an account. So, make sure to check out the associated costs before opening an account in that institution.
How to open a Savings Account?
Opening a savings account takes less than an hour. To set up a savings account, find a bank or credit union you trust or establish an account online, which is a quick and painless process. While applying for a savings account, you’ll need to provide your basic information, including:
- Your name
- Address, Telephone number
- Social Security number
- Photo
- Email address
In addition, it is wise to review &'' compare the fees, interest rates, and balance requirements before deciding to open an account. Some banks require an initial minimum deposit before opening an account. In contrast, some allow you to open an account without any initial deposit and fund it later. You can make your deposit online or in-person at a branch.
Alternatives to a Savings account
Many people find interest rates too low on a savings account. However, a savings account is not a single option to save money for the future. There are some great alternatives to a traditional savings account that gives the best interest rates. Here are the alternatives to a savings account.
- Certificate of Deposits (CDS)
- Money Market Accounts
- Cash Management Accounts
You can choose the savings account’s alternative or savings account according to your wants and needs.
Bottom Line
A savings account can help you save money for future financial goals. If you want to earn high-interest rates, consider alternatives to a traditional savings account. Go for the bank that gives the best combination of features, services, fees, APY, advantages, and convenience. When you’re ready, open an account that works with your situation.
