What Is a Savings Account?

Quick Answer

A savings account is a bank account that lets you safely store your money and earn interest on it. There are traditional savings accounts and high-yield savings accounts, and you can use each to serve a different purpose in meeting your financial goals.

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A savings account is a type of bank account that allows you to store money in a secure place and earn interest on your deposits. Savings accounts also help to encourage saving since they typically come with higher interest rates than checking accounts.

Although savings accounts can help you reach long-term financial goals, like buying a house or expanding your family, they're helpful for shorter-term needs too. Savings accounts are a save place to store money for short term savings challenges. Read on to learn more about how savings accounts work and how to make them work for you.

How Does a Savings Account Work?

A savings account is a deposit account held at a bank, credit union or other financial institution. The primary purpose of savings accounts is to save money for future use and earn interest on the funds you deposit. The main differences between a checking account and a savings account come down to two things:


Savings accounts typically pay interest, which is when your funds earn money just for being deposited in the account. It's an incentive to save money and keep it with the bank.

  • Interest rates vary from bank to bank and by type of savings account. The higher the interest rate on your account, the more money you earn from just keeping your money in a savings account.
  • Savings accounts typically offer variable interest rates. Banks express these rates as annual percentage yield (APY), which is the percentage you can earn over a year including compounding interest.
  • Interest rates can be compounded daily, monthly or annually, depending on the specific terms of your account. The more you save and the longer you hold cash in the account, the more money you earn.
  • Your account should earn at least the current national average savings rate; ideally, you should aim for more. This is where high-yield savings accounts shine.
  • Some banks offer higher rates for larger deposits, so it's worth shopping around for the best deal for your needs.

Withdrawal Limits and Rules

Savings accounts usually come with specific limits on the number and amount of withdrawals you can make, discouraging people from taking money out of their savings too often.

  • Some financial institutions limit the number of monthly withdrawals to six, but this number can vary depending on the institution. Even though the Federal Reserve lifted this limit via an interim rule in 2020 due to the pandemic, banks are not required to comply and may still impose withdrawal limits.
  • Most banks place a maximum limit on each ATM withdrawal transaction.
  • Some banks may charge fees for making too many withdrawals in one month or for going over the withdrawal limit.

Also important to know is that savings accounts provide safety and protection for your money. The government insures bank savings accounts up to $250,000 per person per account through the Federal Deposit Insurance Corporation (FDIC), so even in a worst-case scenario, your money is guaranteed up to these limits. If you have a savings account with a credit union, your account is insured by the National Credit Union Association (NCUA).

Different savings accounts offer varying features, fees, withdrawal limits and interest rates, so check several banks and types of savings accounts (traditional and high-yield) before committing to one.

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How Much Money Should You Keep in a Savings Account?

There's no set standard for how much to keep in your savings account. If you're using a savings account as an emergency fund, experts recommend keeping three to six months' worth of living expenses in your account. This way, you'll have enough money to cover your basic costs if you lose your job or experience unforeseen circumstances. However, saving even more can be helpful to build a larger cushion, especially if you're a freelancer, the sole provider for your family or don't have a regular income.
If you have children, you may also want to consider starting a savings accounts for kids.

Additionally, if you have other long-term savings goals (like buying a home or saving for a baby), you might have more than one savings account. The amount of money you need in your savings accounts depends on your individual financial needs and goals, but the first step in figuring out how much to save starts with creating a solid budget so you know what expenses need to be covered in the first place.

Does Opening a Savings Account Affect Your Credit?

Opening a savings account typically won't affect your credit score because savings accounts don't report to credit bureaus. Most banks will pull your ChexSystems report to verify your identity and banking history when you apply for a new account with the bank. Some banks may also pull your credit report, but this happens more rarely. Any impact this inquiry may have on your credit score will be minor and temporary, however.

How to Open a Savings Account

Opening a savings account is a straightforward process, but it still involves a few steps:

  1. Decide which type of savings account you want. The most common choice is between a traditional savings account and a high-yield savings account. High-yield savings accounts usually offer better interest rates.
  2. Gather the required documents. You'll need at least a government-issued photo ID and Social Security number, but may need to have other identification ready for your application.
  3. Choose your financial institution and open the account online or in person. Interest rates on savings accounts vary, so compare rates before opening an account.
  4. Fund your account. This amount varies by institution, but it usually starts at $25 and up. Know that some banks require you to maintain a minimum balance. This is also an excellent time to set up automatic deposits into your savings account.

Most important, remember to read the fine print about the savings account, including fees, withdrawal limits and any offers or associated promotions. No matter where you open your account—an online bank, credit union or traditional bank—ensure it aligns with your financial priorities and needs.

Other Types of Savings Accounts

There are other types of financial accounts that offer ways to store your money while earning interest, though they have limitations as well.

Money Market Accounts

Similar to a high-yield savings account, these accounts usually offer higher interest rates than regular savings accounts. Money market accounts may make it easier to access your money than some savings accounts. Some require a higher minimum balance to avoid fees, so they often appeal to high-earners.

Certificates of Deposit (CDs)

CDs are a type of savings account that require you to keep your money in the account for a specific amount of time—until the maturity date—to avoid getting hit with a penalty. Still, the interest you'll earn on a CD is typically higher than in a traditional savings account.

Savings Bonds

Savings bonds are government securities that earn interest over time. They earn less interest than with other investments, but they're also lower-risk, making them a solid choice for longer-term savings.

Health Savings Accounts (HSAs)

HSAs are tax-advantaged savings accounts for people with high deductibles on their health plans. You can use an HSA to pay for qualified medical expenses.

Whether you choose the traditional savings route or a combination of the above, the important thing is that you're saving in the first place, setting aside money for future expenses or goals.

The Bottom Line

Saving money is vital to building financial stability, and opening a savings account is a great way to protect and grow your hard-earned dollars. With so many different savings account options available, research your options to find the right fit for your needs. Doing so is a solid start to building the financial future you want.