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What is a 'Savings Account'

A savings account is an interest-bearing deposit account held at a bank or another financial institution that provides a modest interest rate. The financial institutions may limit the number of withdrawals you can make from your savings 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.

BREAKING DOWN 'Savings Account'

Savings accounts generally are opened to keep money that you don't intend to use for daily or regular expenses. Savings accounts differ from checking accounts, which allow you to write checks and use electronic debit to access your funds. Also, savings accounts – unlike checking accounts – typically have limits on the number of withdrawals or transactions you may make each month. 

Advantages of Savings Accounts

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

Disadvantages of Savings Accounts

While the liquidity of a savings account is one of its key benefits, it makes the funds available too readily, which could tempt you to spend them. Savings accounts usually pay lower interest rates than Treasury bills and certificates of deposit (CDs). As a result, they should not be used for long-term holding periods.

How Much Money Should You Have in Your Savings Account?

As a general rule of thumb, 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 keeping more in your savings account, most think that excess money should be placed in higher interest-bearing accounts or used to pay down debt with higher interest rates.

How Savings Accounts Work

To set up a savings account, visit your bank or financial institution or set up an account online through a bank's website. You can make deposits over the counter, 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 use an automated teller machine (ATM).

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