What Is a Savings Account?

A savings account is an interest-bearing deposit account held at a bank or other financial institution. These accounts provide a modest interest rate. They are a great option for people to park their cash to save for short-term needs and emergencies such as a car, furniture, vacations, or medical expenses because they can be easily liquidated without any tax implications.

Financial institutions that offer savings accounts typically limit the number of withdrawals from an account each month. They also may charge fees unless you maintain a certain average monthly balance in the account. In most cases, banks do not provide checks with savings accounts.

How Savings Accounts Work

Consumers can use savings accounts as a vehicle to store their money and earn interest. Banks normally use the funds in a savings account to lend to others. You can find savings accounts at traditional brick and mortar banks, investment firms, or online. Many institutions don't have physical branches—or have very few—so they may be able to offer higher, more competitive rates.

Opening a savings account gives people a place to put their money and keep it away from their everyday banking needs. Savings accounts differ from checking accounts, which allow the use of checks and electronic debits to access funds. Unlike checking accounts, withdrawals and transactions from savings accounts are limited each month. Federal law only allows up to six debit transactions from a savings account before a service fee is added. Most accounts also come with a minimum balance requirement. If the balance dips below that requirement, the account holder is charged a fee as well.

Although most major banks offer low interest rates on their savings accounts, there are many other options available that provide a higher return. Opening an account online with institutions such as CIT Bank, Marcus by Goldman Sachs, Discover, or Ally typically come with interest rates of 2% or more. Deposits and transfers can be done through an app, online, over the phone, or even automatically by linking an account to the savings account.


Savings Account

How to Open a Savings Account

Before you open up a savings account, it's best to decide what it's for. Are you saving for a rainy day or are you looking for a place to put money for something specific like a vacation fund or healthcare? This will help you determine where to open your account and how much you're looking to put aside each month.

To set up a savings account, visit your bank or financial institution, or set up an account online through a bank’s website. You need to provide your name, address, telephone number, as well as photo identification. And because the account earns interest, you have to provide your Social Security Number (SSN), so the bank can send you a 1099-INT. This form shows how much interest earned in the previous year, and must be submitted with your tax return.

You can make deposits at the teller window, set up automatic transfers from your checking account, or have a portion of your paycheck automatically deposited into your savings account. To withdraw funds, you can visit a local branch, make a transfer to another account over the internet or with an app on your smartphone, or use an automated teller machine (ATM).

Key Takeaways

  • A savings account is an interest-bearing deposit account held at a bank or other financial institution.
  • Savings accounts provide moderate interest rates, and are a great option to park cash to save for short-term needs and emergencies.
  • These accounts facilitate saving and make it very easy to access funds.
  • Financial advisors recommend having enough savings to cover at least three to six months’ worth of bills.

Savings Account Advantages

Because savings accounts pay interest, it is more beneficial to keep your unneeded funds in a savings account than in a checking account so your money can grow. In addition, savings accounts are one of the most liquid investments outside of other demand accounts and cash. While these accounts facilitate saving, they also make it very easy to access your funds—much easier than other savings vehicles. It is typically more difficult to cash a bond, make a withdrawal from a retirement account, or sell stocks or other assets than a savings account.

If quick, easy access to savings isn’t an issue, Treasury bills and certificates of deposit pay a higher interest rate and may be a better savings option.

Savings Account Disadvantages

While the liquidity of a savings account is one of its key benefits, the ready availability of funds may tempt you to spend them. That immediate availability comes at a price, however, as savings accounts usually pay lower interest rates than Treasury bills and certificates of deposit. As a result, they should not be used for long-term holding periods.

Ideal Savings Account Balance

Savings accounts are insured by the Federal Deposit Insurance Corporation (FDIC). This means your account balance is fully insured up to $250,000 per depositor should the bank or institution ever fail. This amount includes both principal and interest accrued.

As a general rule, financial advisors recommend you have enough savings to cover at least three to six months’ worth of bills. This gives you a financial cushion in case you lose your job, face a medical issue, or encounter another money-draining emergency. Because of the liquidity of a savings account, you can access the money quickly and easily when you need it. While some analysts recommend keeping more in your savings account, most think that excess money should be placed in accounts that pay higher interest or used to pay down debt with higher interest rates.