What Is a Savings Account?
A savings account is any bank account used to hold money and draw interest. A savings account differs from a checking account in that a savings account can not be drawn on by checks, debit cards, or any other personal financial tool. The other crucial difference is that a checking account doesn’t draw interest.
Savings Account Basics
I don’t want to steer you wrong — not just banks offer savings accounts. You can open savings accounts at credit unions, or you can open a money market fund through an investment company. There are lots of ways to open a savings account, so if you don’t want to do business with a bank, you’re in luck.
Unlike a 401k or an IRA account, savings account funds are easy to get access to if you need to. Simply transfer funds from your savings account to your checking account or even withdraw money directly at your bank. But every savings account is a little different, so your bank may in fact charge for withdrawing money out of your savings account. For the most part, bank members have the ability to freely withdraw money from their savings account, as long as your bank is open or you can get to one of your bank’s ATMs.
One good reason to open a savings account — earning interest on your money. There are other reasons — your savings account is a secure place to store your cash, far better than zipping it up in a plastic bag and burying it in the garden. Even better than a checking account, which we all know earns us exactly nothing.
Savings Account Insurance
Savings accounts are insured by the Federal Deposit Insurance Corporation, or FDIC. When you open a savings account, the FDIC insures your money up to $250,000.
This means if the bank goes bankrupt or fails for some other reason, the FDIC will protect your investment up to a certain amount.
Be sure to check that the savings account you’re opening is FDIC insured — there’s no reason to open an unsecured account — they’re everywhere. Almost every bank, credit union or investment company offers this insurance. Don’t go without it.
How To Pick A Savings Account
Do some shopping — look for a savings account that offers a high interest rate. While it is no longer true that banks offer better interest than credit unions, you should compare a series of both banks and credit unions in order to find a competitive interest rate. Money market funds offer the widest variety of rates, but interest rates will always fluctuate based on the stock market and other financial markets — you may find awesome interest rates one year and the next year be stunned by how low your interest rate offers are. This is why it pays to do your homework.
Because there are so many places to find a savings account, the competition for your money is heavy. You should use this to your advantage. Shop around for the best high interest savings account that you can find.
Some banks offer their customers incentives, everything from cash ($50 deposited to your account at opening) to high interest rates for a year or even cheesy giveaways like cars and vacations. Though these gimmicks are just what they sound like — cheap tactics to get customers — you can use them to your advantage. Make the banks compete for you, and let your money start making you money.
For more information related to savings accounts, see some of the following pages:
- How to Save Money for College
- What Is a Money Market Account?
- What Is a 401k Plan?
- What Is an IRA?
- What Is a Checking Account?
- How to Invest in the Stock Market
- What Is Online Banking?