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Budgeting & Saving

What Is a Savings Account?

A savings account is an interest-earning account held at a bank, credit union or other financial institution. Because they are insured by the Federal Deposit Insurance Corporation (FDIC), savings accounts offer a safe place to save your money and help you keep your savings separate from money you use for monthly spending in your checking account.

How Does a Savings Account Work?

The FDIC insures checking and savings accounts up to $250,000 per account holder. Should your bank fail and you hold less than this amount, your money will be safe.

Checking accounts and savings accounts differ in two key areas, however. First, federal regulations limit the number of withdrawals that can be made from a savings account to six each month. If you exceed this limit, your bank may convert your savings account to a checking account.

Because of this structure, a savings account is an ideal place to park funds earmarked for short-term savings goals. A savings account may also be used as a financial safety net or as an emergency fund because the money can be accessed quickly.

Second, unlike most checking accounts, a savings account earns interest every month. Your account performance will vary based on the financial institution, balance and type of savings account you have, but savings account rates tend to be very low. Depending on how much interest you accrue in a year, your financial institution may report your earnings as taxable income.

What Are the Advantages of a Bank Savings Account?

Savings accounts offer additional benefits beyond safety, liquidity and modest interest. For one, savings accounts are a safer alternative than cash kept at home. Money stashed at home can be lost due to theft, environmental disaster or other mishaps. And cash doesn't earn interest.

And, unlike illiquid assets or other banking products (such as stocks, bonds, CDs or money market accounts), your savings account balance is readily accessible and easily transferable to your checking account. A savings account is also an easy way to put a healthy distance between you and your money, which can help you avoid overspending. It can also serve as an overdraft account if you frequently overdraw your checking account.

Does Opening a Savings Account Affect Your Credit?

Opening a savings account won't affect your credit score in most cases. There is only one circumstance in which a savings account may affect your credit, however: if the financial institution runs a hard inquiry.

Most banks, credit unions and other financial institutions conduct a credit check when you apply to open an account with them. The majority use soft inquiries when you open a savings account, and these do not affect your credit. Some may do a hard inquiry, however, and those can lower your credit score five to 10 points. Hard inquiries stay on your credit report for two years, but they usually only affect your score for a few months.

How to Open a Savings Account

Opening a savings account is easy. Here's how to get started.

1. Know the account opening requirements and interest rates.

Before committing to any one bank or financial institution, review the opening requirements. These include the minimum monthly account balance, the initial opening deposit requirement and the interest rate. Compare these requirements and rates with your plans for the savings account.

2. Consider your needs.

Do you want online banking services, in-person services, mobile app services or all of the above? While some banks may excel in all of these areas, others may specialize in one service over another. For instance, online banks may offer robust mobile banking and higher interest rates but not local branch access. Depending on the bank you choose, you may be able to open a savings account in person, online, in-app or by walking into your local branch.

Also consider how easily you want to access your funds. Some people prefer to use the same bank that holds their checking account for seamless, fast transfers when needed. Others may feel tempted to dip into their savings account too frequently when the funds are so easy to access, and they prefer to open an account with a different institution.

The funds transfer may be immediate if the accounts are with the same financial institution, but you'll probably have to wait until the following business day if the accounts are with separate organizations.

3. Gather the required documents before you get started.

To open a savings account, you will need a government-issued photo ID (such as a driver's license or passport), your Social Security number, a mailing address and the physical address of your home, if it's different.

Savings accounts can only be opened by those age 18 or older. Minors can only open a joint or custodial account with a parent or guardian. Opening an account usually only takes a few minutes, and most banks require you to make a minimum deposit into the account as a final step in this process.

The Bottom Line

Because of the versatility of savings accounts today, and their benefits, consider a savings account as a place to hold money for short-term savings goals, as an emergency fund or as an overdraft fund for your checking account. If you do not already have a savings account or if your current account does not meet all of your needs, explore savings accounts offered by different organizations to find one that is a good fit.

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