Savings accounts are designed to hold money that you don’t plan to spend right away. You can use them to save for short-term goals or long-term goals and most savings accounts pay interest on deposits, helping you to grow your money.
If you’re new to banking, you might have questions like:
• Is a savings account necessary if you have a checking account?
• Why would you put money in a savings account?
• Is it worth putting money in a savings account?
• What is the best savings account to have?
Understanding the basics of how savings accounts work matters for making the most of your money. So here, we’ll spell out what exactly a savings account is and how it works, the pros and cons of savings accounts, the various kinds of savings accounts, and how to open one if you feel it’s right for you.
What Is a Savings Account?
A savings account is a deposit account offered by banks, credit unions and non-bank fintech companies (like Chime or Current). Savings accounts are designed to hold money you want to save versus checking accounts, which are meant to hold money you plan to spend.
In terms of features and benefits, here’s what makes a savings account unique:
• Interest-bearing. Banks and other financial institutions can pay savers interest on their deposits. Online banks like SoFi tend to offer a higher annual percentage yield (APY) than brick-and-mortar banks. For example, at this writing, SoFi was offering 4.20% APY which was 41 times the national average.
• Withdrawal limits. Savings accounts are meant for saving, not spending. Banks can impose monthly withdrawal limits and charge an excess withdrawal fee if you go over that limit. For instance, the Federal Reserve Board had limited withdrawals and transfers from a savings account to six per month. This guideline however was suspended in 2020 due to the COVID-19 pandemic, but it could be reinstated.
• Low minimums. Opening a savings account may only require as little as $1 to get started, though the usual range is $25 to $100. The minimum deposit may be higher at brick-and-mortar banks.
• Automated growth. Savings accounts make it easy to grow your balance through automatic deposits. You can schedule part of your paycheck to be deposited to savings, for example, or set up recurring transfers from another bank account.
How Savings Accounts Work
Savings accounts work by letting you deposit money and then withdrawing it later while earning interest in the meantime. Here’s an example of how to spend (and save) with a savings account.
Say you want to open a new bank account to hold your emergency fund. Your savings goal is $5,000. You open a new account online that has no minimum balance requirements, no overdraft fees, and no monthly fees.
You deposit $100 into your account initially and set up an automatic deposit of $200 per month after you are paid. If the account offers a 1.00% APY, after one year, you’d have $2,514.04 in savings. Of that amount, you’ve deposited $2,500 and the remaining $14.04 is the interest earned.
So is it worth putting money in a savings account? It can be, if you’re earning a high APY on your balances. The more you deposit and the more interest you can earn, the faster your money can grow over time. Just make sure you don’t wind up having that interest eroded by fees.
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Benefits of Savings Accounts
Why should I put my money in a savings account? It’s a good question to ask, since there are other places you keep your money instead. Here, we’ll share the advantages of having at least one savings account.
The main reason to consider a savings account is the opportunity to earn interest. Think of the interest you earn on savings as a reward for keeping your money in the bank instead of spending it.
If you’re looking for the best savings account interest rate, online banks are a good place to start. Online banks tend to have lower overhead costs than traditional banks so they can pass that savings on to customers in the form of a higher APY on deposits. You can look for what are called high-yield savings accounts or growth savings accounts to help you maximize your interest earnings.
Fund Specific Goals
Savings accounts can help you fund different goals and dreams. For example, you might be interested in opening a savings account for a baby if you plan to grow your family. Or you may want to save for a vacation or even a down payment on a home.
One of the advantages of having multiple savings accounts is that you can keep funds for each goal separate. This can make it easier to decide how much to allocate toward each goal and track your progress over time.
Savings accounts are highly liquid since the money that’s in them is easily accessible. You can connect them to other bank accounts in order to transfer funds back and forth. Or you might be able to access savings using an ATM card, debit card, or even checks if your bank offers those features. You’re also not locked into the account the way you might be with a CD account, which can impose a penalty if you withdraw money before it matures.
If you open your savings account at a bank that has FDIC insurance or a credit union that’s insured by NCUA (and most of these financial institutions do carry this insurance), you are insured for up to $250,000 per depositor, per bank, per account category.
Disadvantages of Savings Accounts
There are lots of benefits to keep in mind when thinking about why you would put money into a savings account. But there are a few drawbacks to consider as well.
Savings account interest rates can vary from bank to bank. Again, online banks may offer the highest rates for savers, but rates can change over time. This is because banks will often adjust savings rates following movements in the federal funds rate. So it’s possible that you might find a savings account with a great rate initially, only to see that rate move up or down over time. For this reason, it’s a good idea to keep an eye on that APY you’re earning.
Savings accounts can offer convenient access, but there may be limits on how often you can make withdrawals. As mentioned, banks typically can charge an excess withdrawal fee if you withdraw money from savings more than six times per month, though this was suspended in 2020 due to the coronavirus pandemic. If you get in the habit of making excess withdrawals it can be costly. And in some cases, the bank might convert your savings account to a checking account or require you to close it.
A savings account can grow your money, but you may see better returns by keeping money elsewhere. For example, you could open an investment account and use some of the excess money you have in savings to buy stocks, cryptocurrency, exchange-traded funds (ETFs) or IPOs. Over time, you may see much higher returns from your investments than you would from your savings.
How to Open a Savings Account
Opening a savings account isn’t difficult; most banks allow you to open checking and savings online in just a few minutes. It will go especially quickly if you have the documentation ready before you start the process. In many cases, you’ll need the following:
• Your contact information
• A driver’s license, passport, or other form of acceptable government photo ID
• Social Security number or an ITIN number
• Date of birth
• Address (you may well need a utility bill to verify this)
Before you open an account, it’s important to do some research first. Here are some of the things to consider when choosing a savings account:
• Minimum deposit requirements
• Minimum balance requirements
• Monthly service fees, if any
• Interest rate you could earn
• How you can access and manage your money (i.e. online banking, mobile app, ATM card, etc.)
• Monthly withdrawal limits, if any
• Added features or benefits, if any
Once you decide on an account, you can move on to account opening. You’ll need to link an existing bank account to make your first deposit if you’re saving with a brand new bank, or you could bring cash or a check if you go with a bricks-and-mortar bank. You’ll also need to decide how much of your paycheck you want to save if you’re setting up recurring deposits.
Alternatives to Savings Accounts
A savings account isn’t the only place to keep your money. Banks can offer other options for deposit accounts, including ones that earn interest. If you’re looking for other ways to hold funds, here are three possibilities.
Interest checking accounts, also known as high-yield checking accounts, work like regular checking accounts but they also pay interest on balances the way a savings account might. They may require a minimum balance though.
Certificate of Deposit Account (CD)
A CD account is a time-deposit account in which you agree to save money for a set period of time. The balance earns interest, and, when the CD matures, you can withdraw the initial deposit and the interest that accrued or start a new CD. These accounts can be good for saving money you know you won’t need to spend in the near term. One thing to keep in mind, however, is that if you withdraw money before the CD matures, you will likely pay a penalty.
Money Market Account (MMA)
A money market account is a type of deposit account that combines features of checking and savings accounts. For example, the account may earn interest, and you might be able to write checks or make withdrawals using a debit card. But monthly limits on withdrawals may apply.
Worth noting: Some money market accounts can offer a higher APY than savings accounts, though you may have to make a higher minimum deposit or maintain a higher minimum balance to earn that rate.
Is a savings account necessary? The answer can depend on your financial goals and how you prefer to manage your money. But a savings account can be a useful place to keep money that you plan to use in the future and earn a bit of interest while it sits. It can also be especially convenient if linked to your checking account, so you can set up automatic deductions when you are paid. This technique can seamlessly whisk away money before you spend it.
If you’re interested in finding the right checking and savings option, consider SoFi Checking and Savings It offers a competitive APY, and no monthly, minimum-balance, or overdraft fees. So your money makes more money, faster!
What are the requirements before opening a savings account?
Banks usually ask to verify your identity before opening a savings account and will collect your Social Security number, driver’s license or passport number, and other credentials. You’ll also need to make a minimum deposit to fund your account, though some banks will allow you to do this after the account is open. This will require an account number and routing number for an existing bank account that you’ll transfer funds from, cash, or a check.
Is the interest accrued from a savings account worth it?
Earning interest on a savings account is worth it if you’re getting a decent rate. Online banks can offer higher APYs to savers than traditional banks. But earning even some interest is better than nothing if the alternative is keeping your savings in a piggy bank or under the mattress.
Can you withdraw from a savings account anytime?
Banks usually don’t restrict when you can withdraw money from a savings account, though they may limit how often you can do so. It’s not uncommon for banks to limit you to six withdrawals per month and charge a fee if you go over that limit. However, this policy was suspended due to the COVID-19 pandemic.
Photo credit: iStock/Povozniuk
SoFi members with direct deposit can earn up to 4.20% annual percentage yield (APY) interest on Savings account balances (including Vaults) and up to 1.20% APY on Checking account balances. There is no minimum direct deposit amount required to qualify for these rates. Members without direct deposit will earn 1.20% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. These rates are current as of 4/25/2023. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
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