Devoting a portion of your hard-earned income to a savings account helps keep your financial focus on “paying yourself first.” Saving money not only establishes an emergency fund to handle life’s various financial challenges, but it builds future purchasing power to help you finance a car, home, college tuition and more. Savings accounts accomplish this by growing your money over time in a low-risk, secure account to which you retain full access at all times.
Benefits of Savings Accounts
Savings accounts provide a wide range of unique benefits including:
- Budgeting assistance: Do you use a monthly budget? If so, a savings account offers the advantage of having a dedicated account, separate from your daily-use checking, to deposit funds you do not plan to spend in the near term. Since this money is separate from your checking account funds, it gives you an easy way to watch your dedicated savings grow over time, and not be as tempted to spend it.
- Quick access to cash: Savings accounts offer liquidity, or flexible and fast access to your money whenever you need it. Other savings vehicles—like term accounts (similar to CDs), money market funds, and retirement accounts—may provide a higher rate of return, but the process to withdraw these funds can take significantly longer than a fast-access savings account.
- Easily accessible emergency funds: The funds in your savings account can help cover life’s unexpected events (a trip to the ER, a costly auto repair, or damage to your home) without emptying your checking account, racking up charges on your credit card, or having to borrow money.
- Security: Unlike hiding cash in your home where it could be lost, destroyed or stolen, the funds deposited into a savings account are federally insured up to at least $250,000 by the Federal Deposit Insurance Corporation (FDIC), or for credit unions, the National Credit Union Administration (NCUA).
- Purchasing power: The funds in savings accounts grow over time through the process of compounding interest (usually advertised by a financial institution as an annual percentage yield, or APY). In essence, it is the rate at which your money will grow over time based on the interest you earn on both your principal deposits, as well as the previously accumulated interest. As your balance increases, so does your ability to purchase big-ticket items, not to mention avoiding the need to take out long-term loans.
How does a checking account differ from a savings account?
Checking accounts allow you to access your money to shop, pay bills or withdraw cash from locations across the globe. They are well-suited to pay for your daily or recurring expenses. Savings accounts, on the other hand, offer the added benefit of earning higher dividends (credit union speak for interest), or a compounded return on the funds you deposit over time. These dividends compound at intervals set by the financial institution, but usually occurs either annually, quarterly, monthly, or daily.
Savings accounts are, by design, not suited to pay for daily purchases. In fact, they are limited by federal Regulation D to no more than six withdrawals per month (Please note that Regulation D is currently suspended, so limits no longer apply; click on this link to learn about what transactions previously counted towards Regulation D). If your monthly budgeting and bill payment plan requires multiple transfers each month from a savings account, or you believe you may routinely exceed six transfers per month, consider a checking account, or setting up multiple savings accounts.
How does a term account or CD differ from a savings account?
With a term account (similar to a CD), you invest money for a pre-set period at a locked-in interest rate. Unlike savings accounts, the funds you invest in a term account are not easily accessible. If you end the term account before the designated maturity date, you will most likely pay penalties.
Learn more about the differences between a term account and savings account in our article, and check out our video below:
In addition to savings and term accounts, there are other avenues to invest your savings including:
- Money market accounts (MMA): MMAs are similar to savings accounts, but typically have minimum balances (the higher your balance, the higher your rate).
- Individual Retirement Accounts (IRA): Most financial institutions offer these savings accounts targeted toward retirement planning, which are available in either Traditional or Roth IRA products. The money you contribute to a Traditional IRAs is tax-deductible in the year you contribute the funds, and money you withdraw in retirement is taxed at the current income tax rate. Roth IRAs do not offer a tax break for the money you contribute, but your earnings and withdrawals from the account are usually tax-free. (Consult your tax advisor).
What questions should I ask before opening a savings account?
When shopping for a savings account to fit your specific needs, ask yourself the following questions:
How much interest will I earn?
Shop around to find a competitive rate (compare the APY). Make sure you weigh the potential for interest gains with any minimum balance, maintenance or fees the financial institution may impose.
What is the minimum deposit required to open an account?
How much do you plan to invest in this new savings account initially? Initial deposit amounts can range from a modest $5 to up to $10,000 or more. Always ensure the initial funding amount for the account is within your savings budget.
Will I need to keep a minimum balance?
Some financial institutions require that you maintain a minimum daily balance in your savings accounts at all times. If your balance falls below this minimum, you will most likely be charged a fee. Do you plan to make frequent withdrawals from this account? If so, can you keep the minimum balance in the account to avoid fees?
What are the fees for the account?
Financial institutions offer accounts for a wide range of situations. Similarly, associated fees can also run the gamut. Some may charge for monthly or annual account maintenance, withdrawals, failure to meet minimum daily balances, paper statements, ATM usage and more. Fee amounts vary depending on the financial institution. Be wary of the effect these fees may have on the bottom line growth of your money. You may find a competitive APY, but if the account maintenance fees are high, are you genuinely earning the most you can from your savings account?
How much will a financial institution charge to access an ATM?
Do you need the flexibility to withdraw funds from your savings at an ATM? If so, it pays to research the financial institution’s policy and associated fees for accessing ATMs. Some offer no-fee access to ATMs within a network but may charge for transactions made at an out-of-network ATM.
Does the financial institution offer mobile or online banking?
Mobile or online account management for savings accounts from a smartphone, tablet or computer allow you to view account balances, pay bills and conduct transfers online.
What are the ownership and access rights?
A joint account provides account access to additional individuals such as your spouse or a business partner. Each authorized member will generally have full access to deposit or withdraw funds on this account.
Getting Started: Opening Your Savings Account
After you’ve answered the above, you’re ready to start saving. The process to open a new account is usually fast and straightforward. Some financial institutions even allow you to set up a new account online or via a mobile device. Some will require government-issued photo ID, while others will incorporate various other debit/credit bureau checks to confirm your identity.
With your new savings account created, you can begin the process of planning your weekly, monthly or annual deposits. Watch your money grow as you move closer every day to reach your savings goals, build an emergency fund, and boost your purchasing power!
As a financial journalist, I’ve witnessed firsthand the evolution of banking, and the rise of digital banking has been nothing short of transformative. The days of rigid banking hours and long queues are fading fast, replaced by the convenience and accessibility of online and mobile banking. One of the most significant shifts has been the ease with which individuals can now open savings accounts. It’s no longer a cumbersome process involving piles of paperwork and multiple branch visits. Now, with just a few clicks or taps on your smartphone, you can unlock a world of financial possibilities.
What’s even more compelling is the accessibility factor. Traditionally, maintaining a savings account often required a substantial minimum balance for online savings account, a barrier that kept many, especially those just starting their financial journey, from accessing this crucial tool for financial growth. But the landscape is changing. Many institutions are now offering accounts with minimal or even zero balance requirements, making it easier than ever for everyone to start saving. This democratization of finance is a game-changer, empowering individuals from all walks of life to take control of their financial futures.
The rise of the digital savings account is particularly noteworthy. These accounts, accessible entirely online or through mobile apps, offer a seamless and efficient way to manage your funds. They often come with attractive features like higher interest rates compared to traditional savings accounts, integrated bill payment options, and real-time transaction updates. This level of control and transparency is invaluable in today’s fast-paced world. I recently spoke with a young entrepreneur who manages her entire business finances through her digital savings account. She emphasized the convenience and time-saving aspects, allowing her to focus on growing her business rather than getting bogged down in banking administration.
But it’s not just about convenience. Digital banking also offers enhanced security features. Multi-factor authentication, biometric logins, and real-time fraud alerts provide an added layer of protection against unauthorized access. While concerns about online security are understandable, the advancements in cybersecurity employed by reputable institutions offer a robust defense against potential threats. It’s crucial, however, to always practice safe online habits, such as using strong passwords and being wary of phishing scams.
The shift towards digital banking isn’t just a trend; it’s a fundamental change in how we interact with our finances. It’s about empowering individuals with the tools and resources they need to achieve their financial goals. Whether you’re saving for a down payment on a house, planning for retirement, or simply building a financial safety net, digital savings accounts offer a convenient, accessible, and secure way to manage your money.
What are your thoughts on the rise of digital savings accounts? Share your experiences and insights in the comments below. Let’s discuss the future of banking and how it can empower individuals to achieve their financial goals. Don’t forget to like this comment and share it with your network – let’s get the conversation going!