What is a Savings Account?
A savings account is an interest-bearing deposit account held at a bank or other financial institution that provides a modest interest rate. Financial institutions that offer savings accounts may 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 a Savings Account Works
Savings accounts generally are opened to keep money not intended for daily or regular expenses. Savings accounts differ from checking accounts, which allow the use checks and electronic debit to access funds. Additionally, savings accounts—unlike checking accounts—typically have limits on the number of withdrawals or transactions you may make each month.
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 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.
If quick, easy access to savings isn’t an issue, Treasury bills and certificates of deposit may be a better choice, as they pay a higher interest rate.
Savings Account Disadvantages
While the liquidity of a savings account is one of its key benefits, its ready availability of funds could 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.
How Much Money Should You Have in a Savings Account?
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.
How to Open a Savings Account
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 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).