What is a savings account?
A savings account is a type of deposit account that will help you save money for anything from emergencies, to travel expenses, to large purchases. They typically offer modest amounts of interest to be incurred on the money you save – almost like the bank will pay you for storing your money within the savings account.
Both banks and credit unions offer savings accounts, and you don’t usually need a lot of money to get started. Many banks boast that you can open a savings account with them for less than $100!
These accounts are also federally insured for up to $250,000 per account owner, per financial institution, and per ownership category. The Federal Deposit Insurance Corp (FDIC) insures savings accounts at banks, while the National Credit Union Administration (NCUA) insures savings accounts at credit unions. This insurance means you can rest easy and know that your savings account is a safe, secure way to store your money.
How does a savings account work?
Savings accounts work very similarly to checking accounts, and you can open most savings accounts in the same way and with the same institutions. In today’s digital age, nearly everything can be done online, and such is the case with savings accounts. Simply provide the institution with your personal information, and deposit your money into the account.
You can also visit the financial institution of your choosing in person, and follow the same process. An in-person visit will likely be necessary if the money you have to deposit is cash, although some institutions will allow you to deposit the money via an ATM within a designated timeframe after opening the savings account online.
Many popular financial institutions offer the advantage of linking your savings account to an existing checking account. This makes it easy to move money in and out of both accounts! Be aware that some savings accounts have a limit on how many times per month you can take money out of them, though.
Once you’ve deposited your money into your savings account, you will start accruing interest on that money. The amount you earn is determined by your savings account interest rate, APY, the amount of money you deposit, of course, and how long you keep that money in your savings account. Your bank will compound the interest on a daily, monthly, quarterly, or yearly (most common) basis. At the end of this compounding period, the amount you earned in interest will be credited to your account.
For example, let’s say you have deposited $1,000 into a savings account with a 0.1% APY, at a financial institution that compounds interest annually (yearly). After the institution has compounded your interest, you will have earned $1 in interest for the year, so your savings account balance will be $1,001. At the end of each compounding period, your entire account balance will earn interest, including the earnings that were credited from interest accrued previously.
Why should you have a savings account?
Having a savings account will enable you to keep money separate from your everyday spending cash, making it easier to save that money for emergencies, travel, or large purchases, such as home repairs and vehicle maintenance. Savings accounts also have interest-earning potential, security, insurance, and liquidity of your funds.
Another reason to have a savings account is simply, why not? Savings accounts nearly always have higher interest rates than checking accounts, and most can be opened with very low or even NO monthly maintenance fees.
Although you will accrue more interest if you leave your money in your savings account for longer periods, savings accounts can even be used to save for monthly expenses. Say you save half of your monthly mortgage payment from each of your bi-monthly paychecks. With a savings account, you can easily move money from each paycheck into a secure place until it’s time to pay your mortgage. This method eliminates the need to worry if you will have the money when it comes time to pay those big monthly expenses – because you will know for certain they are secure in your savings account until you need them.
How much money should you try to keep in your savings account?
Everyone will have different financial goals regarding their savings, so the amount of money you should try to keep in your savings account will depend on your personal savings goals and current financial situation.
Many experts recommend saving an emergency fund – three to six months’ worth of living expenses set aside in case of an emergency where you are unable to work or earn income. If this is your intention with your savings account, you will need to figure out what your monthly expenses are. Think of things such as:
- Mortgage/rent
- Household bills, such as electricity, natural gas, and internet
- Transportation expenses, such as gasoline or a bus pass
- Grocery expenses and eating out
- If you have children, think about childcare expenses, food and clothing, activities, etc.
- Pet food and care, if you have furry companions
When you are calculating your monthly expenses, add each of these items to get your total. Then, multiply that total by either three or six, depending on how many months you want your emergency fund to cover. For example, if you spend $5,000 per month, you will need to keep $15,000 in your savings account for a three-month emergency fund, or $30,000 for a six-month emergency fund.
We would all hope not to run into emergencies that leave us unable to earn income, so your emergency fund will hopefully stay in your savings account for a long time. Consider looking for an account with a higher yield interest rate to make the most money off of your emergency fund!
You can also utilize an online savings calculator to see how long until you reach your savings goals.