How to Choose and Open a Savings Account

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Having an emergency fund is the best way to prepare for and safeguard yourself from unexpected financial trouble.

And that means having a savings account. Savings accounts are an ideal way to store your money and earn some extra cash in the form of interest. They can help you meet financial goals, ensure you have cash on hand for emergencies, and generate modest returns. 

With so many options available, finding the right savings account can be confusing, but don’t let that get in the way of implementing smart saving habits so you can be prepared for whatever comes your way.

What Is a Savings Account?

A savings account is opened at a bank or credit union and is used to store money that isn’t used for everyday, transactional purposes like a checking account. Savings accounts strike just the right balance of liquidity – less accessible than your checking account but much more available than certificates of deposit (CDs), savings bonds, or other investment accounts. 

What really sets a savings account apart, especially for holding emergency funds, is that you can access the money immediately if needed. 

“You want your emergency fund to be liquid,” says Rebecka Zavaleta, developer of the personal finance brand, First Milli. “You want it to be in a place where you can easily take it out.”

Banks usually pay a higher interest rate on savings accounts than on checking accounts that typically pay no interest at all, meaning you can earn extra money for keeping your funds in them. 

“If you have extra cash and you’re not comfortable investing it, a savings account can be a great way to earn a little bit of a return, or yield,” says Sri Reddy, senior vice president of retirement and income solutions at Principal Financial Group in Des Moines, Iowa. 

Additionally, savings accounts are FDIC-insured, which guarantees your balance up to $250,000 per bank in the unlikely event it goes out of business. 

Choosing Your Account

When choosing what type of savings account to open, Reddy recommends figuring out what features and how much accessibility you need to feel comfortable. Your decision likely will come down to choosing between a traditional savings account at a physical legacy bank and a high-yield savings account at an online bank.

Some questions to consider:

  • Will the account provide a debit card you can access savings from? Most savings accounts do not offer debit cards, but some may give the option for ATM cards.
  • How quickly do you need to access withdrawn funds? Can you wait a few days if need be? Online-only savings accounts will require transfer to a local account if you want to withdraw directly into cash.
  • Do you want the savings account at the same institution as your checking account? 
  • Are you OK having different banks to get the best return? Online-only savings accounts can often offer a higher interest rate for your money.

If you want to put your money in a traditional savings account, seriously consider the benefits you’re getting from the branch, and ask yourself if it’s worth forgoing significantly higher returns with an online bank. 

Online vs. Physical Savings Accounts

Online-only banks have been rising in popularity in recent years, and you can typically find better savings account rates at online banks. 

An August 2020 NextAdvisor survey found only 21% of banked adults currently have a high-yield savings account, and others are missing out on potential returns by only using a low-yield alternative.

High-yield savings accounts are more commonly found at online banks so, again, asking yourself how accessible you want your funds to be could be a deciding factor. 

Pro Tip

Check out the best interest rates for high-yield savings accounts with NextAdvisor’s rate tracker.

Online-only banks don’t have physical locations you can withdraw your funds from, so it may take a few days to transfer money from an online-only account to an account associated with a brick-and-mortar bank if you need to take out cash. 

While a brick and mortar location offers some convenience, banks that maintain national networks of physical locations carry additional cost of doing business, so you may not get the best rate.

Aside from access and returns, “there’s not that many differences to the underlying account holder,” Reddy says. “Whether it’s a [traditional] savings account or a high-yield account, they all function the same way. I would encourage people to look for the savings account that provides them the greatest access and the return that they can get.”

How to Open Your Account

Opening a savings account functions the same way as opening a checking or other bank account. If you’ve never opened a bank account before, don’t stress. You can usually apply entirely online, and will just need some personal information at the ready such as your government-issued ID, your Social Security number, and money for an initial deposit into your savings account. 

How Much Should You Save?

When planning how much you should start to save, “don’t leave any free money on the table,” Reddy says. 

Start by determining if your employer matches contributions to a retirement fund, and start saving there first. If you can, contribute at least what will be matched by your employer. How much you should contribute beyond that depends on a few factors.

After determining what retirement options you have access to, Reddy recommends building up an emergency fund of three to six months worth of expenses so you’re prepared if you face unexpected circumstances. 

There’s lots of varying advice about how much money you should keep in an emergency fund, but start small and remember that anything is better than nothing. Make growing your emergency fund a goal to work toward over time. 

“After you have a nice three to six months emergency fund I would advise maxing out your Roth,” says Zavaleta, referring to the Roth IRA, a retirement investment vehicle Roth.

Bottom Line

Savings accounts are an easy way to safely store your cash and earn some extra money in interest for doing so. The Federal Reserve has been cutting the borrowing rate, which impacts how much interest you can earn on a savings account, but “just because rates are low doesn’t mean that people who are saving are automatically in a negative position,” Reddy says. 

Even if rates are low, opening a savings account is still a good way to build healthy spending habits and take control of your finances today.