You can achieve your financial goals and save money for the future with the aid of a savings account. Your savings account balance can be affected by a number of factors, such as the interest rate, kind of savings account, and bank you choose.
Continue reading to learn more about savings accounts and your options so you can make an informed decision about your personal finances.
How do savings accounts work?
A savings account is a type of bank account that allows you to save money for the future. People often use savings accounts to park money they don’t need or don’t need for everyday expenses.
Banks use your money to make loans to individuals and businesses, and in return your savings account receives interest. Think of interest as a payment for allowing the bank to use your money.
Deposits and Contributions-
You can deposit money into your savings account in several ways.
- Transfer money from another account
- Deposit a check at a bank branch
- Make mobile check deposit
- Set up direct deposit
- Deposit cash manually Individual
Whether it’s for an emergency fund or to pay for things like a car or travel, building a savings account can help you get into the habit of saving regularly. This allows your balance to grow faster. The larger your balance, the more interest you earn.
Setting goals, such as saving or setting aside a certain amount each month, helps maintain motivation. Automatic recurring transfers also help you make recurring donations without thinking.
Please note that some savings accounts require a minimum balance to avoid fees. Therefore, regular deposits ensure the good standing of your account.
Interest Rates and APY-
As of February 2024, the average U.S. savings account interest rate was 0.46%.
Generally, interest rates for savings accounts are set independently by each financial institution. Interest rates may be affected by inflation and market conditions. Banks can also keep savings rates low when there is little incentive to attract more funds. For example, the use of savings accounts has increased during the pandemic.
If you want to grow your savings account, it’s important to make regular deposits, but paying attention to the annual percentage yield (APY) can also be helpful.
Annual rate of return measures the total amount of interest paid on a savings account in one year. The APR is based on the interest rate and its compounding frequency. With compound interest, you earn interest on the amount you save, plus the interest you earn.
Withdrawals and Access-
Withdrawals from your savings account can be made at your bank or ATM. Your financial institution’s policies may limit the number of withdrawals you can make per month.
The Federal Reserve previously limited withdrawals from savings accounts to six times a month. However, this regulation was rescinded in April 2020. Financial institutions now have the opportunity to remove this restriction. Even if you exceed the limit, you may be charged excessive withdrawal fees.
If you find yourself withdrawing from your savings more often than you expected, a checking account may be a better solution. Checking accounts typically do not have the same withdrawal limits as savings accounts.
Types of Savings Accounts-
When you’re ready to open an interest-bearing bank account, consider the different savings accounts available. Depending on your financial goals and banking preferences, one type of savings account may be more suitable for you.
| Traditional Savings | High-Yield Savings | Money Market | Certificate of Deposit (CD) |
|---|---|---|---|
| Commonly offered basic option. Your interest rate may be low. You may be required to maintain a minimum balance or pay a monthly fee. | Offers an APY many times over the national average. More likely to be found through an online bank, but also at credit unions or local banks. | Typically offers a higher interest rate than a traditional savings account. Often comes with checking features like a debit card, but you may be limited in withdrawals. | Holds money for a fixed term, usually from three months to five years. Often comes with a higher interest rate than a regular savings account, but there is usually a penalty if you withdraw funds early. |
Benefits of Savings Accounts-
One of the biggest benefits of opening a savings account is that it gives you a safe place to store your money that you don’t need to access regularly.
Savings accounts have even more benefits. A savings account is a type of investment, but unlike stocks or real estate, it has relatively low risk. Generally protected from market fluctuations. Depending on the type of investment, you can lose money over time, but with a savings account, your balance will only grow (unless you withdraw the money).
If your savings account is backed by NCUA or FDIC insurance, your money is protected even if your bank fails. As long as the bank or credit union is a member, deposits are insured up to at least $250,000.
Maximize your savings-
Here are some tips and strategies to maximize the benefits of your savings account.
Choose the right account to suit your needs and savings goals. Common types include traditional accounts, money market accounts, certificates of deposit, and high-yield savings accounts.
Set short and long term goals that you want to achieve. An example of a short-term goal is to save a certain amount of money for your next vacation. Examples of long-term goals include building a college fund or saving for retirement.
Build emergency savings in case the unexpected happens. How much you can save in a fund depends on your lifestyle, family size, and financial situation. Many financial experts recommend having three to six months worth of living expenses set aside.
Bottom Line-
A savings account allows you to safely store your money separate from the funds you use regularly in your checking account. Thanks to the interest rate, it can also help you save money to achieve your financial goals.
Interest rates and their characteristics, including fees and limitations, vary by account type and financial institution. Be sure to choose the type of savings account that fits your lifestyle, needs, and financial goals.