Savings accounts provide cash access and tools but it bears noting how savings accounts can help our financial lives. Easy access to funds, Unlike with brokerage accounts, you don’t sell investments in order to convert your money back to cash; savings accounts keep money as cash.
Even before you look at the APY offered on a savings account, make sure you have enough money to open the account and can maintain the minimum balance requirement (if there is one). Also, check to see if the bank charges account fees. Even if it’s a high-yielding account, monthly maintenance fees can cause you to lose interest earnings or even some of your principal. It’s easy to find an account that will help you earn a high APY without getting hit with costly fees. Here are some other items to look at in your next high-yield savings account:
High APY: Aim for the best APY that will generate the most payout on your savings. But if that account isn’t a good fit for you, there are plenty of competitive yields at other banks to consider. Usually, the best rates are offered by online banks, which have lower overhead costs than brick-and-mortar banks.
Low fees: Find an account that doesn’t charge fees. Or if it charges fees, make sure that you’ll be able to meet the requirements to avoid paying them and getting them waived.
Easy withdrawals and deposits: A savings account is meant for growing your money. But your money needs to be accessible when you need it. Banks will let you access your savings in different ways. For example, some banks offer Zelle, which lets you send money to people you know through an app. Some banks provide ATM cards to access your money.
FDIC insured: Your money should be in a FDIC-insured account. Always make sure your bank is insured by the FDIC and confirm you’re within FDIC insurance limits and guidelines.
Bank account bonus: Some banks offer new customers a cash bonus if they open a new account. Those offers may require you to fund the account with “new money,” which means the money comes from outside of the bank.
Important online savings account terminology
Compound interest: Method of calculating interest where interest earned over time is added to the principal. Compounding is usually done on a daily or monthly basis. The more often the compounding, the faster your savings will grow.
Interest: Money that you earn for having your funds deposited with a bank.
Interest rate: A number that doesn’t take into account the effects of compounding.
Annual Percentage Yield (APY): Takes into account the effects of compounding during the year. The best way to compare yields is to use this number, rather than comparing interest rates. The higher the APY, the more income you’ll earn on your cash.
Minimum balance requirement: The amount you have to keep in a savings account in order to avoid a monthly maintenance fee.
Money market account: A type of savings account that may offer an ATM card for ATM withdrawals and/or checks. Here is more information on the best money market accounts
What is a savings account?
A savings account is a type of financial account found at both banks and credit unions. These federally insured accounts typically pay interest, but often at lower rates than other interest-bearing financial products insured by the government, like certificates of deposit (CD). In exchange for lower rates, savings accounts offer more liquidity, allowing for up to six types of withdrawals or transfers per statement cycle (and potentially more). That makes savings accounts ideal for stashing money you may need access to if unexpected costs arise. Savings accounts can play a crucial role in your financial health. Unlike a CD, which forces you to lock up your money for a specified period of time, there’s no set term for maturity with a savings account. So, it’s a good spot to park your emergency fund.
And safety — and preservation of your principal — is the name of the game with these savings products. Savings accounts are insured up to at least $250,000 at banks by the FDIC and at NCUA credit unions, which operate and manage the National Credit Union Share Insurance Fund (NCUSIF).
What are the different types of savings accounts?
Generally speaking, there is only one type of savings account. Some savings accounts may be called high-yield savings accounts; however, that doesn’t necessarily mean that they offer a higher APY. Money market accounts also fall under the official definition of savings deposit accounts. Some banks may also offer special savings accounts for children. Other institutions may have one account for everyone, but may allow the account to be titled so that it can be a custodial savings account. Here are some possible titling options to designate the owner(s) of a savings account. Some banks don’t allow all of these types. Potential titling options include:
Individual account: An account owned by a single person. No one else is allowed to access this account. (An exception can be if someone has a power of attorney for the individual account holder.)
Joint account with rights of survivorship: If two people have a joint savings account — with no other beneficiaries on the account — and one of the joint owners dies, the account is paid to the living account holder.
Payable on death (POD): If an individual savings account has one or more beneficiaries listed and the account owner passes away, these beneficiaries will receive the balance of the account. Appropriate proof, generally a death certificate, is needed. A beneficiary on a joint account, listed as POD, wouldn’t obtain a right to this account until the last account owner passes away.
Uniform Transfers to Minors Act/Uniform Gifts to Minors Act (UTMA/UGMA): Typically, these types of accounts will have one custodian and one minor. The custodian manages the account for the minor until the child reaches age 18 or age 21, depending on the state. Availability of UTMA/UGMAs will depend on the state.
Not all savings accounts are created equal. If you pay close attention to the yields and fees associated with different accounts, you’ll notice that many online banks pay higher yields than their brick-and-mortar counterparts, for example. When choosing a savings account, consider APY, minimum deposit requirements and your financial goals. The best savings accounts will provide a competitive APY, but also give you the flexibility to securely withdraw or transfer money each statement period.
How do savings accounts work?
Savings accounts are liquid bank accounts that usually offer a higher APY than checking accounts. Savings accounts are referred to as liquid because they let you access your money at any time. This feature separates savings accounts from certificates of deposit. A CD requires you to keep your savings in it for a certain term, such as one year or five years, and usually charges you with an early withdrawal penalty if you take your money out early. Keep in mind that while it’s possible to withdraw cash from a savings account, doing so diminishes the amount of interest you earn. The longer you’re able to keep from touching your savings, the more the power of compound interest will work in your favor. Compound interest — or earning interest on interest — allows even small deposits to add up to bigger amounts over time. That feature makes it crucial to compare APYs when choosing a savings account (because APYs include compound interest you earn during the year). APYs are the best way to compare how much interest you’re currently earning or could be earning. You can use our compound interest calculator to calculate your potential earnings on a savings account.