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You're old enough to know the Tooth Fairy and Bigfoot are myths—but are you still falling for falsehoods about savings accounts? Believing misconceptions around savings accounts could keep you from using this essential financial management tool. Here are some common myths surrounding savings accounts and the facts you should know.
1. Myth: Your Money Won't Grow
Unlike checking accounts, which typically don't earn interest, savings accounts are designed to encourage saving by earning interest that can help your money grow. Most savings accounts offer compound interest, meaning you earn interest on the amount you deposit and on any interest that accrues.
Compound interest is expressed as an annual percentage yield (APY) that reflects how much you can expect your money to earn over a year. (Keep in mind that APYs are variable, so they may rise or fall based on the federal funds rate and other factors.)
Choosing a high-yield savings account can help you maximize interest earnings. High-yield savings accounts feature significantly higher APYs than regular savings accounts.
As of February 2024, you could find high-yield savings accounts with APYs of 5% or more. By comparison, standard savings accounts earn an average APY of 0.47%.
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2. Myth: Your Money Isn't Safe
If the bank you choose is insured by the Federal Deposit Insurance Corp. (FDIC), money in covered account categories is guaranteed up to a total of $250,000 per bank, category and account owner.
Covered accounts include savings accounts, checking accounts, certificates of deposit (CDs) and money market accounts. Credit unions insured by the National Credit Union Administration (NCUA) offer similar guarantees, protecting up to $250,000 in deposits per credit union, category and account owner.
To keep your savings even safer, use your bank's mobile app or website to set up alerts of account activity that might signal fraud, such as a big withdrawal or low balance. You can typically choose to be notified by email or text.
You can also add protection by requiring multifactor authentication, such as inputting a code you receive by text, to log in to your bank account. Using biometric data, such as your fingerprint or facial recognition, to log in can also enhance security.
3. Myth: You Can't Easily Withdraw Your Money
You can withdraw money from your savings account at any time by getting cash from an ATM, visiting a teller at a bank or credit union branch, or transferring funds from your savings to a linked account. (Online banks don't have physical branches, but generally contract with ATM networks you can use to make deposits or withdrawals.)
Some banks and credit unions limit how many free withdrawals you can make from your savings account per month. However, you can still access your money at any time; you'll just have to pay a fee for withdrawals exceeding the limit.
4. Myth: You Need a Lot of Money to Open a Savings Account
Some financial institutions require a minimum initial deposit to open a savings account, typically ranging from $25 to $100. Many online-only savings accounts, including high-yield savings accounts, can be opened with $0.
One exception is tiered savings accounts, which may require initial deposits of several thousand dollars. These accounts, featuring increasing APYs as your balance grows, are generally targeted at high-net-worth individuals.
Of course, putting money into your new savings account right away helps you earn interest faster. But even if you save just $5 or $10 per paycheck, making regular deposits eventually adds up.
5. Myth: All Savings Accounts Are the Same
Varying interest rates aren't the only factor that separates one savings account from another. In addition to comparing APYs, you should also consider the following elements when choosing a savings account.
- Type of financial institution: You can open savings accounts at brick-and-mortar banks, credit unions and online banks. Each type of financial institution has its pros and cons; choose the option you feel most comfortable with.
- Fees: Savings accounts may charge fees for using non-network ATMs, excessive withdrawals or account inactivity. Some savings accounts charge monthly maintenance fees, but these can often be waived if you meet certain criteria, such as keeping a minimum monthly balance.
- Bank services: Are you looking for more than just a savings account? If bank services such as safe deposit boxes, CDs, a global ATM network or access to loans are important to you, choose a bank that offers them.
- Welcome bonuses: Banks sometimes offer bonuses to new customers for opening a savings account. While this shouldn't determine your choice of financial institution, it can be a nice plus.
- User experience: A user-friendly banking website and mobile app can streamline your financial life. Also consider the hours, ease of use and helpfulness of the customer service team.
6. Myth: You Need Good Credit to Open a Savings Account
Your credit score isn't a factor in opening a savings account. Unlike applying for a credit card or loan, applying for a savings account doesn't require a credit check. Instead, banks may review your ChexSystems report, which gives them information about your prior bank accounts and banking behavior. A history of overdrafts, unpaid bank fees or nonsufficient funds charges could be red flags that you may not be a reliable banking customer.
The Bottom Line
A savings account earns interest while keeping your money safe and accessible, making it an ideal place to sock away money for a new car, upcoming vacation or emergency fund. Opting for a high-yield savings account can accelerate your earnings.
Savings accounts don't affect your credit score because banks don't report account activity to credit bureaus. However, unpaid bank fees may be sent to collections, which could negatively impact your credit score. Experian's free credit monitoring service can help you avoid unpleasant surprises when it comes to your credit. You'll be able to check your credit report and FICO® Score☉ and get alerts to important changes that could indicate fraud.