A traditional savings account is one of the most basic ways to save money, as well as one of the safest. Deposits of up to $250,000 are insured by the Federal Deposit Insurance Corporation (bank accounts) or the National Credit Union Administration (credit union accounts).
FDIC--The Federal Deposit Insurance Corporation insures deposits at the nation's more than 7,000 banks and savings associations. The FDIC identifies, monitors and addresses risks to these institutions.
NCUA--Congress created this federal agency to regulate, charter, and supervise federal credit unions.
Savings Account Basics
Savings accounts are liquid, or quickly convertible to cash, which makes them ideal for short-term savings, such as for the holidays, a major purchase or a vacation, or an emergency fund. If you need your money right away, you need only to withdraw it from your account.
- Liquid--money available for quick withdrawal
- Emergency fund--money available during financial hardships, such as unexpected medical bills
- Electronic Funds Transfer--the transfer of funds from one account to another via computer
- Wire transfer--electronically transferring funds from a person or an account to another. This type of transfer is most often used for an individual transaction
- Automatic clearing house (ACH)--an electronic network of financial transactions that large volumes of transactions in batches
Typically, the trade-off for liquidity is a lower interest rate. While you’ll earn interest on the money in your savings account, it won’t be as substantial as with other investment vehicles. In other words, you’re probably not going to get rich or retire off the interest you earn from a traditional savings account. But that’s not the point of short-term or emergency fund savings anyway.
That’s not to say that you shouldn’t shop around for the best rates and savings account for yourself. Most institutions offer a few options with a range of interest rates, balance requirements, and monthly service fees. And those are the main items you need to be aware of when choosing your savings account.
- Interest rate--the rate at which interest is paid for money borrowed from a lender
- Annual percentage rate (APR)--the annual cost for borrowing funds over the term of a loan
- Annual percentage yield (APY)--the annual rate paid to a depositor
- Compound interest--interest computed on the sum of an original principal and accrued interest
- Simple interest--the interest charge on the principal of a loan
Fees for savings accounts include monthly service fees and transaction fees. If you’re a savvy saver, avoiding these fees is possible and desirable: Regularly paying fees can eat up the interest you earn, and possibly your savings as well.
Monthly service fees are those charged to simply have an account. But many financial institutions will waive these fees if you maintain a specified minimum balance, or participate in an automatic deposit program.
You may eliminate transaction fees by being aware of your banking habits. If your bank limits withdrawals from ATMs and charges a fee for any withdrawals over a certain number, plan your withdrawals to stay within the limit. And try never to use out-of-network ATMs – those owned and operated by other banks – as you’ll likely incur a fee from both the ATM owner and your bank. Some banks refund fees charged for use of out of network ATMs.
- Overdraft--withdrawing more money than is available in an account
- Overdraft protection--an extension of credit or an automatic transfer of funds from another account you own, usually with the same institution.
Balance requirements are often linked to interest rates. Many banks and credit unions will pay more interest in return for having a higher minimum balance in your savings account. While this may seem reasonable, you need to be sure that you can maintain that higher balance. If you dip below the minimum amount at any point during the month, the monthly service fee will still be assessed.
(Also, if you have a significant sum of money, a savings account may not be best savings vehicle for you. You may want to meet with a financial advisor to establish an investment plan.)
As with any type of savings, your best plan of action is to deposit your money and leave it alone. After all, when interest is compounded, even a small amount of money will add up over a period of time.
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