It is an account that allows a person to deposit money and earn some interest. It is basic type of financial account.
A savings account is insured federally up to 250,000 dollars per account owner. These accounts allow a safe place for saving the money and earn interest. Saving accounts can be found at credit unions and banks. A large amount of money is not needed to open this type of account and also money can be easily accessed.
Need for a savings account
A savings account provides the benefit of liquidity, reliability, and safety. These are good places to keep ones money for a later period and separating money from everyday cash that one spends. These accounts provide a great option to not only save your money but also build up your emergency funds. You can save money for a goal such as a vacation or a home repair.
For example, let’s say a person wants to save $1,000 for home repair. By opening a savings account and contributing $100 each month in this account can help you in meeting your goal within a year. In addition a little interest can also be earned on this balance.
Alternatively, if a person is planning on going on a vacation to Hawai, he can just open a savings account and start saving the money and at the end of the year he can easily withdraw this money and enjoy a vacation.
You can also set up some money in savings account to be used whenever you face an emergency situation like you might need money instantly for a hospital admission.
Another advantage of a savings account is that it offers high interest rates as compared to the checking accounts. Some savings accounts even have a higher APY than some money market accounts. You can get an average APY of 0.06 percent on a savings accounts but some accounts might pay up to 0.5 percent or higher APY.
Many opportunities are there for opening low fee savings account; pesky maintenance fees can be avoided by selecting simple options.
How does a savings account work?
A savings account can be opened online or in person. It can either be opened at a credit union or in a bank. You can simply provide the required information to open an account and then deposit the amount of money you want in this account.
Now the amount of money you need to put in the account varies according to the financial institution. Either way your money with remain safe and insured in this institution. A federally insured institution provides upto 250,000 dollar insurance per person owning the account.
The saving account interest rates also differs according to the institution and may change with time. The money can be removed from the account at any time you wish however a limit of six per month has been set according to the law.
How much should you keep in your savings accounts?
The money you keep in the savings account depends on what your goal is and how much money is required to complete this goal. Financial expert suggest that for an emergency fund a person should keep at least 3 to 6 months’ of his living expenses in the savings account.
For example, if a person spends $5000 per month on average as his living expenses (car payment, food or rent), he should save about $15,000 to $30,000 in his savings account.
However a specific goal may require more money to be saved depending upon what that goal is.
A simple savings calculator can be employed to calculate savings and estimate the time required to save the amount of money required for fulfilling a goal.[i]
How to earning more from a savings account
Some of the ways for boosting your earning through a saving account are as follows:
- Online and community banks tend to provide better yields. They pass the savings directly on to their customers and does not account for money associated with other types of banks. They also offer best rates for opening savings accounts.
- Some financial institutes also provide bonuses up to a hundred dollars for signing up for an account. So, one can look for best bank bonuses and sign up for a savings account with rate.
- A credit union tends to offer a better yield than anywhere else as they are non-profit organizations having high rates and low fees.
- Although savings account provide the opportunity of liquidity but the less you withdraw the money the faster it will grow.
- Look out for saving accounts that have an attractive interest rate but higher fees. It is better to open an account with lower fees. No monthly fee saving accounts are also available.
Options for savings accounts
High-yield savings accounts
These types of accounts offer much higher amounts of returns as compared to traditional savings account. Users of these accounts can get a benefit of compound interest with higher APYs in comparison to brick-and-mortar accounts. High-yield savings accounts provide variable rates of interests so they fluctuate. The rate may go up or down depending upon when you open the account.
One can deposit money at any time in their account and has to follow the six-per-statement-cycle withdrawal. Also the transfer limit applies on all accounts (currently waived due to ongoing pandemic).
Online-only banks provide highest APYs for high-yield savings account. Although physical branch locations are not available but have lower fees, typically higher interest rates, and overall more benefits than brick-and-mortar banks.
Advantages and Disadvantages of savings account
Here are a few pros and cons of savings accounts:
- Liquidity – depositing your money in a savings account does not stop you from withdrawing the money. However, the number of withdrawals is limited to six withdrawals per statement cycle.
- Safety – the money being kept in a savings account at a federal insured bank or credit union is insured thus keeping it safe and secure.
- Growth – not only can you keep your money safe but also earn some modest interest on it.
- The downside of savings accounts is that some other saving products may offer higher interest rates such as money market accounts or certificates of deposit.
- The money is accessible for withdrawal for only six times per statement cycle.
- A loss of purchasing power may occur over time if the savings account has lower yield than the inflation rate.[ii]