Let’s say you have money and don’t need to spend it for a while. What do you do?
Back before there were banks, people would store extra coins in a kitchen jar made from a type of clay called “pygg.” These types of jars later became what we now know as piggy banks.
As you probably guessed, there are now better ways to store your money. Not to mention, your money isn’t going to grow in a piggy bank.
That's where savings accounts come in. Savings accounts can be a way to save and earn money at the same time.
A savings account is a type of account that lets you store your money and many also earn you interest. There are different types of savings accounts; each with its own benefits and product features.
Here are a few examples of savings accounts:
A traditional savings account is an interest-bearing deposit account held at a bank or another financial institution.
A high-yield savings account earns a higher interest rate than a traditional savings account does.
A money market account may have higher interest rates than those on traditional or high-yield savings accounts, and you may be able to write checks to boot, but they tend to have higher minimum balances compared to traditional savings accounts.
In return for depositing your money with the bank, you typically earn interest every month. The amount of interest you get over a year is called the APY, or annual percentage yield. APY is calculated by taking into account the amount of money you’ve deposited into the account plus the compounded interest.
Institutions typically compound interest daily, monthly, quarterly or annually. Here’s an example of how compounding interest works generally:
Say you put $10,000 into a savings account with 1.5% interest, compounded annually.
The first year, you earn 1.5% of $10,000, or $150, in interest. This $150 in interest is added to your account.
In year two, you get 1.5% of $10,150 (your original investment, plus the interest you earned in year one). And, assuming you leave your money in the bank, the interest keeps building from there.
In some cases, online banks can offer higher interest rates than traditional banks since they’re not paying rent and others costs to run “brick-and-mortar” branches.
Savings accounts are useful for putting aside money for big-ticket items. If you have a few things you’re saving for, you could open a savings account for each item you want, naming the accounts accordingly (be mindful of minimum balance requirements for each account).
So, maybe you have one savings account for that engagement ring, another for the wedding and a third for that dream bicycle you’ve been eyeing for years.
Another use for savings accounts: storing emergency funds. Savings accounts are useful for surprise expenses, like paying for a car repair or buying a new washing machine after your old one broke for the sixth time.
Building an emergency fund can be as easy as setting up automatic transfers from your paycheck into your savings account.
Savings accounts from FDIC-insured institutions are protected by the FDIC, an independent agency of the federal government. If a bank where you opened your account were to fail, the FDIC covers your funds, so you’d be protected — up to $250,000 per depositor, per bank.
With a savings account, you don’t have to keep your money in the account for a certain amount of time, like you do with a certificate of deposit (or CD). You can withdraw money from your account whenever you’d like without a penalty. Say you need to withdraw $20,000 to pay for part of your wedding. No problem. With a savings account, you can do it.
Savings accounts generally permit up to six withdrawals or transfers per month. There are some exceptions, like ATM withdrawals however, which are generally unlimited; though some banks have daily limits on the amount that can be withdrawn from an ATM, If it’s an option, you could also visit a bank branch and make a withdrawal through a bank teller.
Putting money into your savings account is easy. A few ways you can do that is to deposit a check, transfer money from a checking account or make an electronic transfer from one financial institution to another.
When shopping around for the right savings account, consider the following questions:
Is the savings account FDIC-insured?
Are there any fees involved?
What interest rate does it offer?
You can use an online savings calculator, like this one from Marcus, to see how much interest you'll earn based on the rate offered and the amount you deposit.