Savings Account

A savings account is a deposit account held with a financial institution that bears interest. Savings accounts offer less access to the account holder’s funds than a checking account would, but they offer much easier access to those same funds than most other investment products.

What is a Savings Account?

A savings account is a deposit account held with a bank or other financial institution that bears interest. It is different from a checking account in two important ways:

  1. A savings account bears interest on deposited funds, whereas a checking account does not.
  2. Checking accounts come with check writing privileges and debit cards so that the account-holder’s funds are easy to access. Savings accounts do not.[1]

How does a Savings Account work?

Savings accounts are generally offered by banks, credit unions, and other financial institutions. With a regular bank or credit union, a person will probably have to visit a bank branch in order to open a savings account. However, some of the institutions that offer savings accounts do not have physical locations and operate solely online. In cases like these, a person will be able to open a savings account from their computer, phone, or tablet.

With a savings account, the account-holder will be able to both deposit and withdraw money from the account fairly easily. However, they will not be able to withdraw money from a savings account as easily as they could from a checking account.

What is the difference between a Savings Account and checking account?

A standard checking account comes with check writing privileges and/or a debit card so that the account holder can directly access their funds to make purchases, pay bills, etc. With a savings account, the account holder will likely have to visit a bank branch in person or request a withdrawal from their online account portal in order to access funds.

Making funds less accessible is one of the reasons that savings accounts exist. True to their name, the point of a savings account is to save money, not spend it. Many savings accounts also come with a limit of how many withdrawals can be made per month and/or a higher minimum balance. This is to encourage the account to keep funds in the account unless they absolutely need to withdraw them.

How does interest work with a Savings Account?

In order to keep account holders from spending the money in their savings account, the accounts offer an additional incentive: They bear interest on the funds deposited inside. Interest is an amount of money that is added on top of the original amount that was either loaned or deposited. With most loans and lines of credit, interest charged to the borrower, but with savings accounts and other investment products, interest is paid to the investor. Interest is usually measured as a certain percentage of the principal loan or deposit amount that accrues over a certain period of time—often yearly.

While savings accounts bear interest, the rate of that interest is very small compared with other types of investment products. The average savings account from a traditional bank bears less than 1 percent interest yearly. Some credit unions and online savings account bear interest at a higher rate, but it usually no greater than a few percent per year.[2]

What is the purpose of a Savings Account?

The purpose of a savings account is pretty simple: it’s to help people save money. It’s a place to put your money that is less accessible than your checking account, but is still easily accessible if you really need it.

With other investment products, like a retirement account, they make it very difficult to access your money before the agreed-upon maturity date. There are usually penalties for withdrawing funds early. While these products can potentially earn a lot more interest over time than savings account, they also are intended for long-term investment only.

A savings account is different. It shouldn’t be used to save for retirement, but it is a great place to store an emergency fund. The money won’t be accessible by debit card, so you’re more likely to keep it rather than spend it. But if you suddenly lose your job and need to live on that money while you find new work, you’ll be able to access your money without incurring any penalties.

If you are looking to improve your personal finances and save more money, setting up an automatic monthly transfer from your checking to your savings account is a great place to start.[3]

References

  1. “Savings Account. Investopedia. Accessed September 15, 2106 at http://www.investopedia.com/terms/s/savingsaccount.asp
  2. Berger, R. “Where To Find The Best Savings Account Rates (The Answer May Surprise You).” Forbes.com. Accessed September 15, 2016 at http://www.forbes.com/sites/robertberger/2014/06/18/where-to-find-the-best-savings-account-rates-the-answer-may-surprise-you/2/#39b913b9e911
  3. Fontinelle, A. “Banking: Savings Accounts 101.” Investopedia. Accessed September 15, 2016 at http://www.investopedia.com/university/banking/banking7.asp?ad=dirN&qo=investopediaSiteSearch&qsrc=0&o=40186