Definition and Example of a Savings Account
A savings account is a type of account offered by banks or credit unions that provides you with a safe place to store your money and often has compound interest. A savings account is a service provided by banks that allows you to store your money while earning interest on deposits. You earn interest because you are lending money to the bank, which then lends it to other people and businesses. Often, you will need to transfer funds from your savings account to access your saved money. If you are interested in earning higher interest rates, consider alternatives to a savings account.
How Does a Savings Account Work?
When you deposit money into a savings account, it is insured by the Federal Deposit Insurance Corporation (FDIC). If something happens to the institution holding your money, you will get your money back – up to a certain limit. Most savings accounts offer compound interest as an incentive to save money. When you deposit money, it earns interest, which is deposited back into the account. The new balance earns interest, and so on.
Using Your Account
In most cases, you can use your savings account for any of the following:
- Depositing or withdrawing cash: One traditional way to make deposits and withdrawals is to go to the bank and deposit or withdraw cash or use an ATM.
- Depositing checks: You can deposit checks directly into your savings account if your bank allows you to do so. Your bank may also allow you to deposit checks into your savings account via a mobile app.
- Transfers to and from checking accounts (internally): If you have a checking account, you can transfer money from your checking account to your savings account within the same bank, usually instantly.
- Electronic transfers (Bank to Bank): You can also make electronic deposits and withdrawals to and from your savings account from another bank.
- Direct deposit: If your employer pays via direct deposit, you can have the funds directly placed into the account.
- Requesting a check: In some cases, you may want to print a check from the bank for a large amount using funds from your savings account.
There is no limit to the amount you can save in a savings account, and you can make as many deposits as you want.
How to Get a Savings Account
Opening a savings account should take less than an hour (sometimes just a few minutes). The easiest way to open an account is to find a bank you trust and open it via an online application. If you prefer to do this in person, visit a local bank branch and talk to them about opening an account.
To open an account, at least one account holder must be 18 years of age or older. Details vary from bank to bank, so it’s helpful to ask if you are opening a savings account for a minor. There are many options available, so check what your bank offers before opening an account for one of your children.
Some other aspects to consider if you are looking into savings accounts are:
- Different banks: Review and compare interest rates, fees, and minimum balance requirements before opening an account.
- Credit unions: If you are considering joining a credit union, check that you are eligible to join. Look for this information online, or call the credit union and inquire about opening an account.
- The information you need: Make sure you have all the information required to open an account. Examples might include government-issued ID (driver’s license or military ID or other ID), your Social Security number, and your mailing address.
If
You may find yourself looking at unfamiliar institutions, make sure they are insured by the Federal Deposit Insurance Corporation (for banks) or NCUSIF (for credit unions).
How Much Does a Savings Account Cost?
While savings accounts are typically free, they do come with restrictions and some potential costs. There are usually minimum balances that you must maintain in the account.
Banks often charge monthly or annual fees, or both, if you do not maintain the required minimum balance. These minimum balance fees will be deducted from your account. You can lose money with a savings account if your balance drops to zero and your bank deducts maintenance fees. You may also be charged overdraft fees.
Credit unions do not charge fees in the same manner as banks. Instead, most of them require a hold on a specific amount that you must deposit when opening your account. For example, if the required amount is $25, you need to deposit that money to start your account, and you will not have access to it as long as your account is open.
Some banks or credit unions may waive savings account fees if you have another account with that institution. Fees may be charged if you close your checking account and keep your savings account, as accounts are generally bundled together.
Alternatives to Savings Accounts
When many people want to open a savings account, they may find that the rates available are relatively low. To get the best possible interest rate, you might consider something other than a traditional savings account.
Online Savings Accounts
Online-only accounts are a great option for higher earnings and lower fees.
Due to lower fees, you can find many of the highest-yield savings accounts at online banks. Many online banks also allow you to start without a minimum deposit, although some higher-yield accounts require larger deposits.
Although they are online banks without physical branches, you often still receive an ATM card to withdraw cash. You can also electronically transfer money to or from your local bank or credit union in about three business days. You can add funds by depositing checks using your mobile device.
Money Market Accounts
Like savings accounts, money market accounts pay interest on your deposits and limit the number of times you can make certain transfers. However, they typically pay more than savings accounts, and it is easier to spend your money. If you are interested in comparing accounts, you should look for accounts with the best rates.
Certificates of Deposit (CDs)
If you can commit your savings without touching it for at least six months, you might be able to earn more in a Certificate of Deposit (CD). These accounts come with varying time commitments, and you may have to pay a penalty if you withdraw funds early.
There are some flexible CDs that offer early withdrawals without penalties, but this variety often comes with a slightly lower rate.
Conclusion
A savings account is a service provided by banks that allows you to store your money while earning interest on your deposits. Online accounts, money market accounts, and certificates of deposit are good alternatives to traditional savings accounts. When you open an account, you need to pay attention to fees, minimum balances, interest rates, and other features offered by the bank or credit union. Compare the available options and choose the account that best fits your financial needs and goals.
Source:
https://www.thebalancemoney.com/savings-accounts-4073268
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