Getting the best interest rate on your savings account is one of the easiest ways to make your money work for you.
This guide covers the basics and answers all the most common questions when opening a savings account.
What is a savings account?
A savings account is a bank account where you can safely deposit and store the money you don’t need for your everyday expenses.
The funds you deposit in your savings account remain there until you decide to withdraw them to spend on whatever you’ve been saving for — like buying a new car, putting a down payment on a home, or covering emergency costs.
Benefits of a savings account
Savings accounts offer many advantages.
They’re one of the safest places to put your money since the funds you deposit are insured by the Federal Deposit Insurance Corporation (FDIC) — or the National Credit Union Administration (NCUA) in the case of credit unions — for up to $250,000 if the bank goes under.
Savings accounts also give you easier access to your funds than some other investment tools, like certificates of deposit (CDs).
And finally, in addition to safety and liquidity, most savings accounts offer a limited but consistent rate of return in the form of interest.
Finding the best savings account
When shopping for a savings account, look for the following things:
- High APY: The account’s annual percentage yield (APY) determines how much your deposits earn in compound interest in a given year. A higher APY means more money in your account.
- Low fees: The best savings accounts charge no or low maintenance fees and low penalty fees. If an account does charge fees, aim for one that will waive them if you meet certain requirements.
- Accessibility: You want your funds to be available when you need them. Try to get an account that makes deposits and withdrawals as easy as possible.
- FDIC-insured: Always make sure your bank is insured by the FDIC and confirm you’re within FDIC insurance limits and guidelines.
- Account offers: Banking is a competitive business, so keep your eyes open for perks, like a bonus for opening a new account.
The six types of savings account
- Traditional Savings Accounts
These are the basic savings accounts offered by brick-and-mortar banks and credit unions.
- High-Yield Savings Accounts
These accounts offer higher interest rates than traditional savings accounts. You’ll often find them online.
- Money Market Accounts
Money market accounts combine some features of savings accounts with those of checking accounts. They earn interest on your balance while also allowing you to write checks or make withdrawals and purchases using a debit card.
- Kids and Student Savings Accounts
These accounts teach children, teens, and students to save money. They offer unique tools and advantages but usually have an age cutoff.
- Specialized Savings Accounts
Some banks offer specialized savings accounts designed for a specific purpose, like a down payment on a home.
Limitations of a savings account
Federal Reserve Board Regulation D limits savings accounts activity to no more than six withdrawals or transfers per month. If you go over this number of transactions, you might be charged fees.
Some financial institutions also require a minimum opening deposit. Others limit how much you can deposit at one time, or how much you can keep in the account at any given time.
FDIC and NCUA deposit insurance coverage are also limited to $250,000. If you have more than that in your savings, you should divide the amount across multiple accounts to ensure all of your funds are insured.
How to use a savings account
Savings accounts, as their name suggests, are designed for saving money.
Because of this, making withdrawals from a savings account is more complicated than from a checking account. If you want to spend the money in your account, you’ll often have to transfer it to a checking account first. This may require some planning if your checking account is at a different bank.
Once your account is open and funded, consider setting up direct deposits to ensure you reach your financial goals.
How to avoid fees
The easiest way to avoid fees on your savings account is to limit your number of monthly withdrawals.
Some accounts also charge maintenance and penalty fees if you don’t meet specific requirements, so make sure you’re up to speed on the details and that you meet the criteria.
What to know before opening a savings account
Before opening a savings account, make sure you have enough money for any initial deposit and minimum balance requirements. Also, check for any fees that might eat into your savings.
Some banks and credit unions require photo ID to open an account. You might also have to lift any outstanding freezes on your credit to be eligible.
What is savings account interest and how does it work?
Interest is the cost of borrowing money. You pay interest to borrow money and collect interest when you lend money.
When you deposit money in a savings account, you’re lending that money to the bank, which then makes loans to other individuals and businesses. The bank charges interest on its loans and pays interest on deposits.
The interest rate on your savings account determines how much the bank pays you to keep your funds on deposit. Interest rates are low on savings accounts because of the COVID-19 pandemic and an abundance of savings. Banks profit from lending, not saving, and lately, less people are applying for loans.
Average savings account interest rate
According to the FDIC, the national average interest rate on savings accounts is 0.06% APY.
Understanding the basics of compound interest
The interest you earn on your savings is usually added to your account balance, either daily, monthly, or yearly. That extra money in your account means you earn even more interest the next time it’s calculated. This process is called compounding.
Your savings account’s annual percentage yield (APY) depends on the frequency your bank or credit union compounds interest. The more often they compound, the faster your savings grow.
FAQs about interest on savings accounts
Why is knowing the best savings account rates significant?
Knowing the best rates helps you make your money work for you. The higher your account’s interest rate, the more you earn on your savings.
What monthly fees do savings accounts usually have?
The best savings accounts charge low or no monthly maintenance fees. When they do have fees, you can often avoid them by meeting specific balance or transaction requirements.
Beware of penalty fees for overdrafts, out-of-network ATMs, wire transfers, and cashier’s checks. Some banks may also charge a fee if you close your account and withdraw your money before an initial time limit.
Do the best savings account interest rates change over time?
Yes. Interest rates on savings accounts are variable and can change over time, often based on the target interest rate set by the Federal Reserve.
How often do interest rates change?
Interest rates will usually remain the same for several months at a time, but it’s a good idea to check your rate every month to see where you stand.
What do the best savings accounts have in common?
The best types of savings accounts offer high APY, low fees, easy access, and sometimes perks.
What’s the long-term benefit of compounding?
When you reinvest the interest you earned on your savings account back into your account, you earn more money in the long term.
How do banks make money from savings accounts?
Banks pay lower interest rates on savings accounts than the rates they collect on loans. The difference between the rates is called the interest rate spread.
Why do online banks pay more interest?
High-yield online savings accounts often pay more interest because online banks have fewer overhead costs.
Do I have to pay taxes on my savings account?
Yes. The interest you earn on a savings account is considered taxable income. If you earn interest from your savings account, you’ll be required to submit a 1099-INT form to the IRS.
Is it wrong to have multiple savings accounts?
Having multiple savings accounts isn’t necessarily a bad thing and can even be valuable to organize your personal finances. It also won’t affect your credit score.
However, too many open accounts can lead to extra service charges and an increased risk of fraud if you don’t monitor them closely. You should only open new savings accounts for a specific purpose or project.
Can I make payments and purchases from my savings account?
Unlike checking accounts, savings accounts usually don’t offer a debit card for you to make purchases. You can make online payments from your savings account, but remember that you’re often limited on the number of withdrawals you can make every statement cycle.
Can I write a check from my savings account?
Savings accounts usually don’t allow check writing. However, you might be able to withdraw money and have your bank issue an official bank check.
The bottom line
Getting a high-interest rate on your bank account is one of the easiest ways to grow your nest egg.
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