Rather than keeping all your money in an easy-to-access checking account, it’s smart to spread some of the excess into a savings account.
There are a few restrictions, but you have the chance to earn interest on the money within the account. That’s why it’s better to place your cash reserves in this type of account rather than simply letting it sit in your checking account.
When deciding on your savings account, you’ll have three different types to choose from. We’ll go into those in greater detail, as well as other factors you should consider during the selection process.
You’ll also learn more about how interest accrues and how to open either an online savings account or one at a physical bank. When you’re finished reading, you’ll have a solid understanding of how savings accounts work and the best way to use one for your own finances.
How does a savings account work?
To open a savings account, you will typically need to visit a bank or credit union and complete an application. You may need to provide identification and proof of income. You may also be required to make a minimum deposit to open the account.
Once the account is open, you can deposit money into it and earn interest on your balance. Many banks and credit unions offer online and mobile banking options. This makes it easy to manage your account and make transactions from anywhere.
What are the benefits of a savings account?
There are several benefits to opening a savings account:
- Safety: Savings accounts are FDIC-insured, which means that your money is protected up to $250,000 in the event that the bank fails.
- Convenience: You can easily access your money through ATMs, online banking, or by visiting a branch.
- Earnings: While the interest rates on savings accounts may be lower than other types of investments, they can still help you earn a small amount of money on your balance over time.
- Discipline: Having a savings account can help you develop good financial habits by encouraging you to save money regularly.
How to Choose the Best Savings Account
The right savings account should match your financial goals and make it easy to grow your money without unnecessary fees.
Start by thinking about how you plan to use the account. If you’re saving for emergencies, choose a high-yield savings account with easy access and no withdrawal penalties. For long-term goals, consider adding a money market account or CD to earn more interest.
As you compare options, look at:
- Interest rate: A higher APY helps your balance grow faster.
- Minimum balance requirements: Some accounts require a daily balance to earn interest or avoid fees.
- Fees: Watch for monthly maintenance, withdrawal, or ATM fees.
- Accessibility: Make sure the account supports mobile banking, online transfers, and ATM access.
- Customer support: Choose a provider with reliable service in case issues come up.
Finally, most banks are FDIC-insured up to $250,000, and credit unions are insured by the NCUA for the same amount—so your money is protected.
How does interest work in a savings account?
Savings account interest is usually compounded daily, monthly, or quarterly—not just once a year. The more frequently your interest compounds, the more you’ll earn over time.
Daily vs. Annual Compounding
Let’s say you deposit $5,000 into a savings account with a 1% APY. If the interest only compounds once a year, you’d earn about $50 after one year. But if it compounds daily, you’d earn slightly more—about $50.25. That small difference grows larger over time, especially as your balance increases.
Why Compounding Adds Up Over Time
Two factors can boost your long-term savings:
- Ongoing contributions: Regularly adding to your account increases the principal, which means more interest earned each cycle.
- Rising interest rates: While current rates may be modest, they’ve been much higher in the past. As rates rise, so does the power of compounding.
The earlier you start and the more consistent you are, the more you’ll benefit from compounding over time. Even small gains can snowball into something significant with patience and consistency.
Savings Account Limits and Restrictions
Savings accounts come with a few important rules—some set by the federal government, others by the bank itself.
Withdrawal Limits and Debit Card Use
The federal limit allows up to six convenient transfers or withdrawals per month, including those made online, by debit card, or through pre-authorized payments. These rules apply whether you’re transferring money to another account or making a purchase directly.
Withdrawing money too frequently—especially through digital methods—can result in fees or even a forced conversion to a checking account. To avoid that, try to plan ahead and group your transfers.
ATM Withdrawal Limits
ATM withdrawal limits also count toward the six-per-month rule. Even though ATMs are often the most convenient way to access your savings, those transactions are considered part of your monthly limit. If you exceed it, your bank may charge a fee or restrict access to your funds.
Minimum Balance Requirements
Some savings accounts require you to maintain a minimum daily balance, especially those that offer higher interest rates. If your balance drops below the required threshold, you may face monthly fees or earn a lower interest rate.
Before opening an account, review the withdrawal limits, debit card rules, and balance requirements. A little planning can help you avoid fees and make the most of your savings.
Types of Savings Accounts
As mentioned, banks and credit unions offer three common types of savings accounts: basic savings accounts, money market accounts, and CDs.
Each one has different pros and cons associated with it, so it’s good to learn about all of them to find the best fit for you. Some people even prefer to spread out their savings over several types of accounts.
It all depends on what you intend to do with your money and when you want to access it. Understanding all the details of each plan type can prevent you from getting stuck in a financial pinch later down the road.
Basic Savings Account
A basic account is just that — an easily accessible account that allows you to store your money separate from your checking account. While you do earn interest with it, don’t expect it to be much.
In fact, on the low end, you’ll receive just 0.01% while high-yield savings accounts range between 3.50% and 5.50% APY (annual percentage yield). Still, the dismal interest rates are compensated by easy to access funds. You can withdraw them directly from your bank’s ATM with a debit card if you have a physical branch near you.
With online banks, an electronic transfer can go through as quickly as the same day. It may take a bit longer in certain situations, like if you complete the transaction late at night or on a weekend or holiday.
Another advantage is that they come with low or no balance minimums. If you’re just starting to save, this is a convenient and cost-effective way to store your money. Saving money is easy and fast for beginners and seasoned savers alike with a basic high-yield savings account.
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Money Market Account
For a slightly more sophisticated savings product, consider a money market account. You’ll need a higher deposit to get started than you would with a basic account, but you’ll benefit from a better interest rate.
You’ll likely be able to find a money market account with an APY ranging between 0.75% and 5.25%. Just like a regular savings account, you can access your money anytime you’d like — as long as you maintain the minimum balance requirements.
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These accounts are also subject to the federal withdrawal and transfer limits, so plan accordingly. To get an account started, expect to commit to an initial deposit of $1,500 or more.
Many banks tier their deposit levels so that the more cash you put into your account, the better interest rate you’ll receive. If you have a large amount of savings that you don’t anticipate spending in the near future, it could be a suitable option for you.
Certificate of Deposit (CD)
If you’re looking for the highest interest rates on your savings, a certificate of deposit (CD) might be your best option. CDs typically offer higher yields than regular savings accounts—especially for longer terms. Most are FDIC-insured and free to open, making them a low-risk way to grow your money.
But there’s a trade-off: your money is locked in for a set period, usually between six months and five years. The longer the term, the higher the rate. If you withdraw early, you’ll pay a penalty—often by forfeiting a portion of the interest you’ve earned.
CDs are best if you don’t need immediate access to your funds and want a guaranteed return over a specific time frame.
How to Open a Savings Account
Opening a savings account is quick and straightforward. Most banks let you apply online, while smaller banks and credit unions may ask you to visit a branch.
You’ll need:
- A valid ID
- Your Social Security number
- Basic personal info
- A minimum deposit, if required
If you already bank with the institution, the process is even faster—they likely have your info on file.
Managing Your Savings With Online and Mobile Banking
Once your account is open, set up online access and download the bank’s app. Most apps let you:
- Check your balance in real time
- Deposit checks by photo
- Transfer funds between accounts
- Monitor interest earnings
Linking your savings to your checking account also makes it easy to automate transfers and stay consistent with your savings goals.
Opening a savings account is one of the simplest ways to build financial security—and it only takes a few minutes to get started.
Final Thoughts
A savings account is one of the simplest and most effective tools for building financial security. Whether you’re setting aside money for emergencies, future goals, or just looking to earn a little interest on your cash, the right account can make a meaningful difference.
Look for an account that offers a competitive rate, low fees, and easy access to your money. And don’t be afraid to adjust over time—your financial needs will change, and your savings strategy should change with them.
Taking a few minutes to choose the right savings account now can set you up for long-term success.
Frequently Asked Questions
What is a high-yield savings account?
A high-yield savings account pays more interest than a traditional savings account, helping your money grow faster over time. These accounts are typically offered by online banks and credit unions, which have lower overhead and can pass the savings on to you.
They’re a good option if you have a larger balance and want a better return without locking up your money. Just know that other accounts—like money market accounts or CDs—may offer even higher rates, depending on the term and deposit amount.
Can I withdraw money from a savings account anytime?
Yes, but there are limits. Most banks cap “convenient” withdrawals—like online transfers or ATM withdrawals—at six per month. Going over the limit can lead to fees or account restrictions.
Also, some accounts charge fees for certain transactions, especially if you use an out-of-network ATM. Always check the account terms so you’re not caught off guard.
Is a savings account the same as a checking account?
No, a savings account and a checking account are two different types of bank accounts. A checking account is typically used for everyday expenses and transactions, such as paying bills, making purchases, and withdrawing cash.
A savings account, on the other hand, is designed for saving money and earning interest. Checking accounts typically have more flexibility and convenience for daily transactions, but savings accounts often offer higher interest rates.
Can I have both a savings account and a checking account?
Yes, you can have both a savings account and a checking account at the same bank or credit union. Having both types of accounts is a smart financial strategy. You can use your checking account for everyday expenses and your savings account for longer-term goals, such as saving for a down payment on a home.
