Roughly 70% of Americans have a savings account balance of less than $1,000.
As a nation, we have been struggling to save money, let it be for an emergency fund or retirement. If you’re a little low on your savings and plan to change that, you’ll need a savings account.
Here is everything you should know about a savings account before opening one.
What is a savings account?
A savings account is a basic banking account that allows you to store money while earning interest on your deposits. Savings accounts have an FDIC insurance of up to $250,000 per user, which means your funds are protected against bankruptcies and any other kind of financial mishaps.
Savings account vs. checking account
- Savings account are designed with the primary purpose of saving money, which means you may get limited withdrawals or restrictive terms for transferring funds.
- Checking accounts are made for daily use and frequent transactions. Ideally, you should maintain sufficient balance to cover your expenses and some emergency funds.
Interest rates or APY
- Savings accounts offer interest on your money. You can choose high-yield savings accounts to get higher returns on your funds.
- Most traditional checking accounts do not pay interest. There is no doubt that you can find some online banks offering interest, but the rates aren’t as high as their savings counterparts.
- Savings accounts are built for savings, which means you should avoid taking frequent withdrawals. As per Regulation D, you can take a maximum of six withdrawals in a month from your savings account.
- Checking accounts have no withdrawal limits. In fact, these are built for frequent financial usage. You can use checking accounts for grocery shopping, bill payments, and much more.
- Savings account are unlikely to charge maintenance fees from account holders.
- Checking accounts come with maintenance charges. The average American pays $7.69 in fees for checking accounts.
- Checking accounts come with additional features, such as auto-bill payments, debit cards, and overdraft protection.
- Savings accounts are simple offerings with limited features. Some online banks offer smart money management tools to boost your effective savings rate and money management.
How to choose a savings account?
Opening a savings account is a fairly simple process, but choosing the right savings account could be tricky.
One of the first things you should do is define your goals for your savings accounts. How do you want to use your savings account?
If you want to save money for multiple goals, choose a savings account that provides goal-based savings options. Similarly, if you intend to use your savings account for emergency savings, make sure that your bank offers easy access to funds.
If you want a bank with a better mobile experience, factor it into your search process. On the contrary, if you need access to a local branch, you may want to stick with a local bank or credit union.
Here are some factors you should consider before opening a savings account.
- Competitive interest rates: Start by looking for a savings account with higher interest rates. It is important to note that the traditional brick-and-mortar banks have lower interest rates than their modern online counterparts. If your current bank offers a lower APY, you should seek other options. We found online banks, such as Ally Bank or Citizens Access Bank, that offer APY of 1.50% or higher for savings accounts.
- Avoid tiered interest rates: Some banks offer tiered interest rates, which requires you to maintain a higher balance to get the best interest rates. Be cautious of such practices. Seek a bank that offers competitive interest rates with no minimum balance requirements.
- Avoid banks with higher introductory rates: It’s a common practice among banks to lure customers into opening an account with higher introductory rates. However, these rates don’t last for long. It is true that banks control their ongoing interest rates. Still, you should find a bank that offers similar rates across the deposit period.
- Pay attention to fees: Fees can take a significant chunk out of your net returns. Ideally, your bank shouldn’t charge maintenance fees for your savings account, but there are other charges. It could be a low-balance penalty, excessive withdrawal charges, or transfer charges. Look for a bank with a transparent fee policy.
- Easy access to funds: If you are using a savings account for emergency savings, you will require instant access to your funds. Find banks that offer mobile banking, online transfers, and even debit cards. It should be simple enough to withdraw funds.
- FDIC insurance: Most banks already provide FDIC insurance, but if you’re going with a new online bank, make sure that they offer FDIC insurance or NCUA (credit union) insurance. FDIC and NCUA offer protection of up to $250,000 for your savings account.
- Additional features: In addition to these features, seek out services, such as automatic transfers, smart money management, goal-based settings, and even round-up savings.
A case for online savings accounts
Online savings accounts have gained popularity over the past couple of years. If you are looking for a new bank, here are some reasons for choosing an online savings account.
- Higher APY: Because of their digital operations, online savings accounts, including high-yield savings accounts, pass-on the benefits of limited overhead expenses to customers in the form of higher APY.
- No fee structure: Most online savings account come with a no-fee structure.
- Mobile services: Online banks offer high-end mobile banking experience. You can expect all the features your traditional banks offer, along with access to more digital payment options.
- Smart money management: A growing number of digital banks are offering smart money management features. You can turn your savings account into a money management app.
A savings account is a basic banking account everyone needs at some point in their life. If you have been stashing away your extra cash in a no-interest checking account, it’s time to open a savings account now!