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Money you save for a rainy day or major purchase could technically live in your checking account (or under a mattress), but savings accounts are a better place to park cash for emergencies and big-ticket items. Savings accounts offer numerous perks, including interest and deposit insurance, but funds are still liquid so you can access money when you need it. Below, we list four benefits of having a savings account.
1. You Earn Interest on Deposits
Savings accounts tend to offer a higher interest rate than checking accounts, which allows you to earn a better return on sums stashed for financial goals and emergencies. Today, the average interest rate on savings accounts is 0.37% compared with 0.06% for interest checking accounts.
Some high-yield savings accounts offer an annual percentage yield (APY) of 4% or more. Say you have $5,000 in an account earning a 4% APY, and you deposit $200 each month for a year. At year's end, your balance would be $7,652, and $252 of that would be from interest earnings. Had that money been in a checking account, you might have earned no interest or a much lower sum.
2. Your Money Is Insured
During a volatile economy, savings accounts are a low-risk place to stash money. If your money is in a federally insured account, $250,000 is guaranteed by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Association (NCUA). And if you have a joint account, up to $250,000 is guaranteed per account owner.
Federal deposit insurance is a type of protection in place to give consumers peace of mind that all or a large part of deposits will be accessible if a bank or credit union shuts down. For example, when Silicon Valley Bank failed on a Friday in March 2023, customers' money didn't disappear. The FDIC opened a bridge bank to make funds and banking services available to customers on the following Monday morning.
3. You Can Make Quick Deposits and Withdrawals
Financial institutions may offer linked checking and savings accounts that let you transfer money instantly. This can make it easier to schedule regular deposits and transfer money out of the account in emergencies. Some savings accounts also have an ATM card.
However, note that some banks limit you to six savings account withdrawals each month and charge a fee if you go over the limit. Planning out your transfers can help you avoid the fee.
4. You Can Separate Money for Different Goals
Savings accounts are easy to sign up for, and opening multiple accounts could help you organize your cash by goals. Perhaps you have savings for emergencies, but you also want to save for a trip or a new car. Separating money can help you visualize progress toward each goal.
In some cases, you could even benefit from making some money less accessible by choosing a savings account without a debit card that's not linked to your checking account. One strategy could be having your checking and emergency savings accounts linked together for easy access. Then open a separate high-yield savings account at another bank for other goals.
With this tactic, you can't easily draw from savings at an ATM, and it might take several days to electronically withdraw money from the account. This could make it less convenient and tempting to spend cash you have set aside for, say, a house down payment, wedding or car.
How to Open a Savings Account
If you're in the market for a savings account, follow these steps for opening one:
- Determine what you have to deposit. Many savings accounts don't require an initial deposit, but minimum deposits vary. Review your budget to see what money you have available, and then compare minimum requirements with different financial institutions.
- Compare rates. APYs vary by account, and reviewing multiple options can help you determine where you might be able to earn the highest return on your savings.
- Check fees. Savings accounts can have monthly maintenance fees, overdraft fees, excessive transfer fees and more. Compare fees for different accounts and check what conditions you have to meet to have fees waived. In some cases, maintaining a certain balance can qualify you for a fee waiver.
- Apply for the account. When you apply, account applications typically ask for your name, address, driver's license or state ID number and Social Security number or tax identification number, so have that information handy. The financial institution may also give you directions on how to make your first deposit during the application process.
The Bottom Line
Opening a savings account is a good way to keep savings easily accessible while earning a higher interest rate than checking accounts provide.
However, for longer-term savings goals, consider that savings account interest earned may not be enough to keep up with inflation, and your balance could become less valuable over time as prices rise. That's why a savings account is generally not the best place to put the money you won't need for a while. For example, savings for retirement or your child's college education might earn a better return when invested in the market.
If you decide a savings account is what you need, shopping around to compare APYs, account fees and features can help you choose the right savings account to meet your goals.