What is a Savings Account and Should I Open One?
Point of interest
Savings accounts can help you reach your financial goals and put you in a good place in case of emergencies. They can also help you maximize your money by earning interest, no matter the size of the deposit.
Whether you’ve been building a nest egg for several years or you’re just getting started with a plan to reach your savings goals, it’s important to have the right tools for the job. While there are many ways to save money, one of the most fundamental — and easiest — methods is through the use of a savings account. But how do savings accounts work?
While you may have heard of a savings account, you may not be aware of all the benefits that using a savings account can offer for improving your financial security.
What is a savings account?
The savings account definition is a traditional bank account that allows individuals to store money safely while earning interest. Savings accounts are available at nearly any bank or credit union, and most financial institutions allow customers to open a savings account with or without a checking account.
Should I open a savings account?
If you already have a checking account open at a bank, you may think adding a second account for your savings is unnecessary. However, savings accounts provide some important features that checking accounts don’t offer, and adding a savings account to your financial portfolio can give you some additional flexibility when managing your finances.
You may want to open a savings account if you would benefit from any of the following features:
Higher earned interest than with checking accounts
Some banks offer checking accounts that earn a small amount of interest, but these accounts usually target high-income members, require excessive minimum balances of > $10,000 and are only offered through select institutions. Even if you can find an interest-bearing checking account and keep the minimum required balances, a traditional savings account is likely to provide a higher interest rate.
Account funds are distanced from your debit card
For many shopaholics, swiping your debit card at the store can be an easy way to overspend. Having a separate savings account with protected funds that aren’t linked to your debit card can help curb that habit.
Even if you are self-disciplined with your spending, it can still be a good idea to keep some digital separation from most of your funds. If your wallet is ever lost or stolen, your debit card could fall into the wrong hands. Criminals can also set up skimming devices at gas pumps or ATMs to hack your debit card information. Hacking debit card data is becoming easier than ever.
Storing a majority of your hard-earned money in a savings account can mitigate the risk if your bank card is ever compromised.
Provides a place to build emergency funds
Research from the Federal Reserve shows that 4 in 10 Americans would have trouble paying for a $400 emergency, and 51% of Americans are only one missed paycheck away from being in serious financial trouble.
Savings accounts can help you avoid this financial blunder by giving you a place to build up an emergency fund. Many financial experts recommend having at least three months worth of expenses in an emergency fund to withstand any kind of emergency, but starting with any savings at all is a step in the right direction.
Can separate spending from savings
Another good financial habit is setting aside savings out of every paycheck before paying your bills. When all your income is in a single pot, it can be challenging to set aside money, as it muddies the waters. Without separate accounts for regular expenses and savings, it can be harder to track your spending and stick to a budget.
Watching the balance grow in your separate savings account can also be a great motivator for continuing to work toward your financial goals.
Funds are FDIC or NCUA insured
Your great-grandfather might reminisce about sticking his savings in a jar under the bed, but that’s not necessarily the best way to protect your money. The Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Association (NCUA) gives depositors confidence in knowing their money will be protected in the unlikely event of a total bank failure.
Anyone who deposits cash into a U.S. bank account is automatically protected by this insurance for up to $250,000 by the FDIC and credit unions deposits are insured up to $250,000 by the NCUA. By keeping your funds with the financial institution, your money is earning interest while being carefully protected from those under-the-bed thieves.
How to open a savings account
If you’ve decided a savings account is beneficial to your money management strategy, it’s important to know what to expect in advance to help you save time at the bank. If you gather all the necessary information in advance, the process of opening the account will likely take less than an hour.
To open a new savings account:
- Decide which bank account you’d like to open. This will involve comparing different banks and the accounts within each bank. Most banks offer several types of savings accounts to meet a variety of customer needs. To know which is best for you, consider how much you have available for an initial deposit, how much you plan to keep in the account over time, what additional features you might need and how much interest is being offered. Then look for the bank and the account type that best meets your needs.
- Gather the necessary documentation. This will likely include proof of residence, identification documents and an initial deposit. Most banks publish requirements for opening accounts on their websites, so be sure to look online first and make sure you gather everything before heading to the bank.
- Visit the bank to sign the account paperwork. To save some time once you arrive, you may want to schedule an appointment with an account specialist. Your account specialist will review your documentation, get your signatures on all necessary paperwork and deposit your initial funds into your new account. If you already have a checking account with your chosen bank, you may be able to open a new savings account easily through your online account or mobile app.
The final word
A savings account can provide a good distinction between the money that you want to use on a daily basis and the money that you want to save up for any special occasion or retirement. Good news is that you can also earn interest while leaving your money put in a secured account. The process after selecting the bank where you want to store your money is pretty straight-forward and targeted for any type of consumers.