We often think of earning and spending as the two main functions of money — but life starts to get fun once you learn to save.
Americans saved 6.4% of their discretionary income in January 2022, according to the Bureau of Economic Analysis. Consumer saving fluctuates with economic conditions, particularly when there’s an emotional instinct to put money aside.
Just look at Americans’ behavior during the coronavirus pandemic starting in March, 2020. “People responded to panic in March  with a very high degree of uncertainty,” says Tim Shaler, the economist-in-residence at iTrustCapital, a digital asset IRA trading platform, “We saw people hoarding cash, responding to their fear we might be in a situation where they need a lot of cash on hand.”
Whether “hoarding” money or simply putting some aside for a rainy day, an FDIC-insured savings account is a secure and convenient home for your cash. Ahead, we take a look at what savings accounts are, how savings accounts work, and how they can keep your money safe for unexpected events ahead.
What Is a Savings Account?
For many, a savings account is secondary to your checking account at your bank of choice. Savings accounts mainly serve the purpose of storing your money, while your checking account is used for monthly expenses and everyday transactions. Since most people keep both accounts at the same bank, you can easily transfer money between the two accounts as needed.
A savings account is the perfect place to store an emergency fund. “This could be a few thousand dollars or even tens of thousands of dollars, and it’s money you shouldn’t be using unless you absolutely have to,” says Kali Roberge, chief operations officer at Beyond Your Hammock, a financial planning company in Boston.
But not all savings accounts are the same. For example, you can opt for a high-yield savings account, which typically offers a much higher interest rate than traditional savings accounts.
How Do Savings Accounts Work?
Savings accounts are a common deposit account, meaning they are a convenient and secure place to store money, as well as transfer money in and out. You can deposit cash into your savings accounts via check or cash deposits, wire transfers through the Automated Clearing House (ACH) network, or other accepted forms of payment.
Compared to a checking account, you’ll typically have fewer methods of withdrawing money from your savings account. Most savings accounts don’t offer the ability to write checks or make transactions with a debit card. In addition, the federal government places limits on how many times you can withdraw from your savings account. Under Regulation D, banks allow no more than six outbound transfers or withdrawals per calendar month or statement cycle from a savings account. If you do go over your limit, you’ll likely be charged a fee by your bank.
Traditionally, sayings accounts used to earn significantly more interest than checking accounts as a way to both incentivize and reward customers for letting the bank use their money while it appeared to sit in their account unused. However, unlike investment vehicles such as ETFs, index funds, and mutual funds, savings accounts won’t grow your money exponentially. Today’s best high-yield savings accounts only offer roughly between 0.5% and 1% interest, with a few rare exceptions.
Types of Savings Accounts
Traditional Savings Account
The textbook definition of a savings account is a bank account that earns interest. Traditional savings accounts have pretty low interest rates. According to the Federal Deposit Insurance Corporation (FDIC), the current national interest rate is .06%.
A traditional savings account is one that you’ll find at a big established bank, and it’s often linked to a checking account at the same institution.
High-yield savings accounts typically offer higher interest rates than traditional savings accounts. If you have $1,000 in a high-yield savings account with a 0.6% APY, you’ll earn $6 in interest over 12 months. A traditional savings account with an APY of 0.06% will earn you just $0.60 for that same amount over the same time period.
High-Yield Savings Account
High-yield savings accounts, most of them from online banking institutions, have become popular in recent years because of the higher interest rates they offer compared to traditional savings accounts. Without the overhead of maintaining physical branches, online banks can offer better incentives than traditional brick-and-mortar banks.
However, in March 2020, the Federal Reserve cut target interest rates to near-zero. That caused nearly every lender and bank to lower their rates in turn. As of February 2022, the best of these interest rates range from about 0.4% to 0.6% but fluctuate based on the economy and the individual bank. Thus, while many high-yield savings accounts still offer better rates than traditional savings accounts, the difference isn’t as stark since interest rates are low across the board.
Compared to transferring between a savings and checking account at the same legacy brick-and-mortar bank, there may be a waiting period of a few days when you move money from an online savings account to a traditional checking account. Keep this in mind if you could be in a situation where you need the money at a moment’s notice.
Other Savings Accounts
In addition to traditional and high-yield savings accounts, there are other options for storing your savings, like CDs and MMAs.
Certificate of deposits, or CDs, are a type of savings account in which you deposit money for a specific period of time and generally earn a higher interest rate the longer you keep it in the CD. The downside here is you lose the interest rate and will likely incur fees if you need to take the money out early. Typical terms of CDs range from three to 60 months.
MMAs, or money market accounts, can be considered a blend between a checking and savings accounts. Like savings accounts, they limit you to six withdrawals per month under Regulation D, and they typically offer higher interest rates than checking accounts. But MMAs also give account holders access to checkbooks and debit cards, as checking accounts do. MMAs may come with higher initial deposit minimums than checking or savings accounts.
Savings Account vs. High-Yield Account
Savings account rates have been low across the board since the beginning of the COVID-19 pandemic. National averages currently sit at 0.06%, and the best high-yield savings accounts typically offer between 0.4% and 0.6% APY.
“What this means is money essentially is worth less, and banks are paying less for you to keep your money sitting in savings accounts,” says Jully-Alma Taveras, a NextAdvisor contributor and creator of Investing Latina.
Still, high-yield savings accounts are a much stronger option than a traditional account for earning interest, Taveras says. Even though the difference may not be as stark as in the past, a high-yield savings account with an APY of 0.6% will still outperform a traditional savings account with an APY of 0.06%.
Here’s how the difference can add up:
Potential Earnings Over 12 Months
|EXAMPLE SAVINGS||TRADITIONAL SAVINGS ACCOUNT (0.06% APY, compounded monthly)||HIGH-YIELD SAVINGS ACCOUNT (0.6% APY, compounded monthly)|
With any type of savings account, make sure to look for banks that are FDIC or NCUA-insured (so your money is protected in the event the bank fails) and take note of any fees or minimum deposit amounts required.
Why Have a Traditional Savings Account at All?
While a high-yield savings account will grow your savings faster than a traditional savings account, that shouldn’t be your only consideration when choosing where to open a banking account.
Many high-yield savings accounts are offered by online-only banking institutions, who typically have lower overhead costs and pass those savings along to their customers. These institutions typically offer convenient online options, access to partner ATM networks, and customer service over the phone, email, and chat. However, they often won’t have physical branches and they have limited options for depositing cash.
If you conduct most of your banking activities online, a high-yield savings account from an online institution is likely to be the best choice for you. However, if you value in-person customer service, or need to regularly deposit cash into your account (such as if you’re a restaurant worker who’s primarily paid in cash tips), a traditional savings account with a brick-and-mortar bank in your area may be a better fit for you.
Keep in mind that if your checking and savings accounts are at different banks, there may be a waiting period of a few days when you transfer money between the two accounts. If you already have a checking account at a traditional bank, you may find it worthwhile to keep your savings account at the same bank for greater convenience at the tradeoff of a lower APY.
No matter if you opt for a high-yield savings account at an online bank or a traditional savings account with a brick-and-mortar bank, make sure to look for banks that are FDIC or NCUA-insured (so your money is protected in the event the bank fails). Also take note of any fees or minimum deposit amounts required.
Savings Account vs. Money Market Accounts
Money Market accounts are a sort of hybrid between a checking and a savings account.
Technically, money market accounts are considered to be deposit accounts under the Federal Reserve’s Regulation D, just like savings accounts. That means customers are limited to six withdrawals and/or transfers per month, with some exceptions. However, customers typically get a checkbook or debit card when they open a money market account, making them best suited for infrequent occasions in which you need to dip into your savings.
Money market accounts typically offer similar interest rates as savings accounts, and both typically have higher rates than checking accounts.
Savings Account vs. Checking Accounts
Both savings accounts and checking accounts are deposit accounts, but there are a few main differences.
Checking accounts are meant to store money you plan to spend. The money sits in your checking account — usually without earning interest — until you make a debit card transaction, pay with a check, or make a cash withdrawal.
Typically, checking accounts come with a debit card, a checkbook, and access to ATMs. Some checking accounts offer overdraft protection if you spend more than you have, even linking to a qualified savings account to use in case.
In contrast, savings accounts are meant for storing cash safely — not for making everyday transactions. They tend to offer slightly higher interest, have limits on the number of withdrawals you can make each month, and don’t come with a checkbook or debit card.
How Much Should You Keep in Your Savings Account?
There are typically no account maximums when it comes to how much you can put into your savings account, says Michelle Brownstein, a certified financial planner and senior vice president of the Private Client Group at online wealth advisor Personal Capital. Just remember that FDIC insurance only covers up to $250,000.
“From a financial planning standpoint, a general rule of thumb is to have three to six months of expenses in cash,” says Brownstein. You should aim to have a little more set aside if you have inconsistent income or a major purchase on the horizon.
Sometimes it takes a few years to build up to saving the right amount of cash, and that’s OK. You can start building your emergency fund now by taking small, actionable steps, such as automatically depositing a percentage of your monthly paycheck into your savings account.
On the other hand, it’s also common for people to keep too much cash in their savings accounts. Once you’ve saved up a three-to-six-month emergency fund and have enough cash in savings for future purchases and other goals, you should look next to investing your discretionary income — especially while interest rates on savings accounts are so abysmal.
“If the money is [in the] long term meant to support you, it shouldn’t be sitting in cash. It needs to be invested,” Brownstein says.
For beginner investors, though, the move may be intimidating. “With investors that are just starting out, they carry way more cash than they need to because they’re not sure what to do with it. They work so hard to earn it, and they don’t want to lose it,” Brownstein says.
Although the stock market inherently contains some risk, historical performance of the stock market as a whole in the long term has been positive. If you have a long time horizon — such as if you’re saving for a retirement that’s decades away — a well-diversified portfolio of index funds can help mitigate your risk while offering returns many times higher than the APY on even the best high-yield savings account.
Read our beginner’s guide to investing to learn more.
How Do I Open a Savings Account?
It only takes a few short steps to open a savings account:
- Compare your options: Pick a bank to open your savings account. Look at interest rates, brick-and-mortar locations, FDIC insurance, monthly fees, and balance requirements (some banks have a minimum). Then, pick one that best fits your personal needs — even if it’s not the one with the highest APY. If you already have a checking account with a bank, it may be worth asking your bank if they have any special incentives for existing customers who open a new savings account.
- Prepare the right documents: Banks require information to verify your identity, such as a social security card, driver’s license, proof of address, and your existing bank account information (to be used to fund your new savings account).
- Submit your application: When you’re ready to open your account, submit your application and any supporting documents required. If you’re applying online, it typically only takes a few minutes for your application to be approved and your new account to be open. You can typically access your new savings account right away.
- Fund the account: Make your first new deposit into your savings account via electronic transfer, check, or cash deposit (if you’re opening an account in person). Some banks may require a minimum deposit when you open your account. If that’s the case, you normally have about 30 days to make sure the average balance on the account matches the minimum requirements.
What are the Best Savings Accounts?
Ready to fatten up your emergency fund or start saving for your next vacation? It’s time to open a new savings account. Here’s a quick rundown of some of the best savings accounts on the market today:
Prime Alliance Bank
Prime Alliance Bank offers full-service deposit account offerings including checking, savings, money market accounts, and CDs.
American Express National Bank
American Express’ consumer banking branch offers high-yield online savings with fairly good rates for savers — at least relatively speaking. American Express doesn’t offer ATM access, but there are workarounds for that.
Ally Bank is one of the most popular online banking options on the market. It has a robust online and mobile app experience, so you can organize and maximize your savings easily.
Marcus by Goldman Sachs
Marcus by Goldman Sachs, an online-only banking division of Goldman Sachs, offers great interest rates for its high-yield savings accounts. It also offers investing accounts, credit cards, and loan products.
Capital One’s online banking division builds upon its credit card offerings and has notable savings accounts like the 360 Performance Savings. This account may be a good way to venture into online banking while still enjoying the benefits of a traditional bank with physical branches.
Discover is usually known for its credit card business, but its online banking options come with competitive rates. Discover Bank is a great option for someone who prefers all their accounts in one place.
Frequently Asked Questions (FAQs)
Are Online Savings Accounts Safe?
Online savings accounts are generally safe if they are from an accredited bank with insurance through the Federal Deposit Insurance Corporation (FDIC) — an independent federal agency that insures your deposits up to $250,000 in the event your bank folds. Credit unions are insured by the National Credit Union Administration (NCUA), instead of the FDIC, for up to $250,000. Not all banks or credit unions are FDIC or NCUA-insured, so make sure to only open accounts with financial institutions that are insured.
When in doubt, use the FDIC’s BankFind tool to confirm the online bank in question has insurance. This free tool allows users to search a bank by its name or web address. You can find insured credit unions though the NCUA’s credit union locator.
On top of sniffing out the obvious red flags, make sure the bank or credit union has a good reputation by reading online reviews and customer complaints. Check it out with the Better Business Bureau (BBB), and verify that all information across the bank’s social media platforms and website is congruent.
Do Savings Accounts Have Debit Cards?
Banks rarely offer the option to get a debit card with your savings account, though it does happen. If you do request a debit card, just remember that you’ll be limited to six withdrawals per month and face fees if you go over that amount. It’s better to think of your savings account as backup, overflow, or a waiting room where cash isn’t to be touched on a regular basis.
If you find yourself wanting a savings account debit card, perhaps a better strategy is to transfer less into savings each month so that you feel like you have enough to cover your expenses. When you are ready to dip into savings, use one of your six transactions to move money over judiciously from savings into checking, where you can use it as freely as you wish.