What is a savings account?
What is a savings account?
A savings account is a bank account that allows you to securely store your money while generally earning interest. This means the bank pays you to keep your funds deposited, with annual returns on some accounts reaching 0.50%. Plus, unlike investments, savings accounts are federally insured up to $ 250,000, so you won’t lose your money if the bank goes bankrupt.
Why do you need a savings account
Using a savings account creates a distance between everyday pocket money, kept in your checking account, and cash intended for a later date, such as an emergency or vacation. Unlike most checking accounts, savings accounts usually earn interest as well.
What you need to know about savings accounts
Savings accounts with strong APYs can help you grow your money. Lending money to the bank allows them to offer loans to other customers, so the bank pays you a small amount of interest as a thank you.
“A little interest” is all too true for most accounts, which offer low rates, but you can find higher rates at online banks. These banks do not have to support expensive physical branches, allowing them to offer annual percentage returns, or APYs, which are significantly higher than the national average of 0.06%. Accounts also tend to have low initial deposit requirements and generally don’t charge a monthly maintenance fee.
Compare savings accounts online
Choose an online savings account with high rates and low fees.
Money kept in a savings account is not as accessible as money kept in a checking account. Banks typically limit the number of certain transfers from a savings account – online, by check or debit card, for example – to six per month. There is usually a charge for making additional transfers. Note that withdrawing money through a cashier or ATM does not count towards the six per month figure.
The limit was previously a federal requirement, but in April 2020, the Federal Reserve announced it would remove the cap in response to widespread financial distress caused by the coronavirus situation. As a result, some banks and credit unions have relaxed this restriction.
“Savings accounts help you store money that you don’t need immediately. Avoiding excessive savings withdrawals can ensure it’s there when you do. “
It should be noted, however, that withdrawal limits can be a blessing in disguise. Savings accounts help you store money that you don’t need immediately. Avoiding excessive savings withdrawals can ensure it’s there when you do.
If you’re looking for easier access to cash, consider opening a checking account. You can read NerdWallet’s list of best checking accounts to find some that don’t have a lot of fees and might even earn interest.
How much to keep in your savings account
It’s a good idea to keep three to six months of living expenses in your savings account in the event of a job loss or other emergency. You may need to set aside more if you have additional savings goals, like a new car or a special vacation. But saving even $ 500 can save you a lot of minor financial hardship.
You can start by making automatic savings check deposits on a regular basis, like every payday. Saving as little as $ 25 a week can add up to over $ 500 after five months.
After building a cushion, look to the future. Consider investing for long-term goals, like retirement. An individual retirement account, for example, is a solid next step for those with enough savings. An IRA can be riskier than a savings account, depending on the investments you choose in it, but it can also offer better returns over time. (Learn to understand how much you should be saving for retirement. Learn more about individual retirement accounts.)
Alternatives to savings accounts
There are other short-term savings options that do not carry investment risk. Here are some alternatives insured by the federal government:
Money market accounts are savings accounts that usually have checking functions. For example, they can come with a debit card or the ability to write checks. But as with regular savings accounts, transactions are usually limited to a handful per month.
Certificates of deposit, or CDs, hold money for a fixed term, ranging from a few months to a few years. In general, the longer the term, the higher the interest rate. Only open a CD with money that you won’t need immediately, as withdrawing money before the end of the term usually results in a penalty.
Cash management accounts, or CMA, are cash accounts offered by non-bank financial service providers such as investment firms or robo-advisers. They pay interest and can be especially handy if you have an investment account with the same provider. (Lily how CMAs stack up against high yield savings accounts.)
Where to find the best savings accounts
If a basic savings account serves you the best, start your research by checking out online banks and credit unions. These types of financial institutions, very present in NerdWallet’s list of the best savings accounts, keep fees to a minimum, offer good rates and generally have powerful mobile apps to help you manage your savings. If you plan to do most of your banking at a neighborhood branch, compare the accounts to some of the best national banks that are near you.
You can open a savings account by submitting an application, usually online or at a branch. You will need to provide your social security number and contact details, as well as at least one piece of identification, such as a driver’s license or passport. When the account is open, you can make your first deposit with an online transfer from another bank account. Your bank may also accept paper checks or even cash deposits if you open the account in person.
A good savings account provides a safe place to park your money while earning interest. By opening one with high rates and low fees, and making regular deposits, you can ensure you have funds set aside for your savings goals.