What Is a Savings Account?

What Is a Savings Account?

While checking accounts are designed for paying bills and managing your spending, savings accounts serve as a holding place for excess cash. And unlike most checking accounts, savings accounts pay out an annual percentage yield (APY), allowing your balance to earn interest. These accounts encourage saving and can be found at banks, credit unions and other financial institutions.

How Does a Savings Account Work?

A savings account is a type of deposit account that provides easy access to your money. You can tap your funds through electronic transfers, ATM withdrawals or in-person withdrawals if your financial institution has brick-and-mortar locations. There are two main types of savings accounts:

• Traditional savings accounts: These are typically offered by large banks and credit unions, and rates are on the lower side. As of September 2025, the average rate on a traditional savings account was 0.40%, according to the Federal Deposit Insurance Corp. (FDIC).
• High-yield savings accounts: You can expect above-average APYs, or high yields, with these accounts, with online banks usually offering the best rates. At the time of this writing, some high-yield savings accounts have APYs as high as 5.00%.

There are two key distinctions that make a savings account different from a checking account

Your Money Earns Interest

With a savings account, your cash will earn interest just for sitting in the account. Banks pay out interest as a way to incentivize saving and motivate you to keep your money with them. APYs vary depending on the financial institution and the type of savings account you have. Rates are also variable, so they can fluctuate. Interest can compound daily, monthly or annually. The more often it compounds, the more interest you'll earn, especially with an account that offers a high yield.

There May Be Withdrawal Limits

Many banks and credit unions put a cap on how many free electronic transfers and withdrawals you can make per month. The limit is usually six per billing cycle, though some banks offer unlimited withdrawals. This is why it's important to compare financial institutions and read the fine print before opening an account.

Exceeding the withdrawal limit could result in a fee or restrictions on future withdrawals. In extreme cases, your bank might convert your savings account to a checking account—or even close your account. However, withdrawal limits generally don't apply when you take money out of your account at an ATM or in person at a local branch.

How Much Money Should You Keep in a Savings Account?

There's no limit on how much money you can keep in a savings account—it's really up to you.

That said, a high-yield savings account is often considered the best place to keep your emergency fund. Whether you run into a surprise medical bill or a drop in income, you'll want the ability to access your cash savings when you need it. The rule of thumb is to save up three to six months' worth of expenses, but you might aim higher depending on your circumstances.

You can also use a savings account to hold money for short-term financial goals. That may include buying a house, going on your next vacation or starting a business.

Does Opening a Savings Account Affect Your Credit?

No, opening a savings account will not affect your credit score. That's because your account activity is not reported to the credit bureaus. But it's worth noting that most banks will pull your ChexSystems report before approving you for a new account. ChexSystems is a banking reporting agency that keeps tabs on previous red flags in your account history. That could include overdrafts, unpaid negative balances and involuntary account closures.

Pros and Cons of a Savings Account

Savings accounts come with potential benefits and downsides. Here are some things to consider before opening an account.

How to Open a Savings Account

Opening a savings account is relatively quick and easy, whether you're going with an online bank or a traditional brick-and-mortar bank.

1. Compare savings accounts. Interest rates and fees can vary, so you'll want to do your homework before choosing an account. Also consider ATM availability, customer reviews and whether there's a minimum deposit to open an account.
2. Gather the required documents and submit an application. You'll need to provide a government-issued photo ID, a second form of identification (such as a Social Security number or birth certificate) and basic contact information. You can likely submit an application online or in person.
3. Make your opening deposit. Once you're up and running, you can fund your new savings account and start using it. Linking it to your checking account can make it easy to transfer funds as needed.

Other Types of Savings Accounts

A savings account isn't the only way to get the most out of your cash reserves. You can also explore these other savings vehicles to help grow your wealth.

• Money market accounts: A money market account combines features of a checking account and a savings account and often offers a high yield compared to traditional savings and checking accounts. Your money will earn interest, but you'll likely have a debit card or checkbook for easy withdrawals. Just be on the lookout for fees, minimum balance requirements and withdrawal limits.
• Certificates of deposit (CDs): CDs offer fixed interest rates that may surpass a high-yield savings account. The catch is that you'll be expected to keep your money in the account until it matures—otherwise, you'll likely face an early withdrawal penalty.
• Savings bonds: These low-risk securities allow you to effectively lend money to the U.S. government. In exchange, savings bonds pay out interest. Just don't expect a huge return on your investment.
• Health savings accounts (HSAs): If you have a high-deductible health plan, you could use an HSA to save for future medical expenses. Contributions are tax deductible, you'll enjoy tax-free growth and you won't be taxed on withdrawals that are used for qualified medical costs.

Frequently Asked Questions

The Bottom Line

Saving money is an important part of financial wellness. A savings account can allow you to build your cash savings and earn interest without risking your hard-earned money. The goal is to find a savings account that offers a competitive interest rate with little to no fees. Doing some research beforehand can help you find the best account for your needs.