What is a savings account, and how does it work?

When you start earning money, you need a place to keep it. A savings account keeps your cash safe and earns interest, allowing your money to grow as you work toward your savings goals. While you’ll likely use a checking account for everyday spending, a savings account is useful for storing funds for short- and long-term financial goals.

What is a savings account used for?

You can use a savings account to keep money separate from your spending money. People typically use savings accounts to set aside money for a short-term savings goal or emergency fund. You can easily access the money in the account, but since the account isn't usually connected to a debit card, you're less tempted to withdraw it.

How does a savings account work?

When you deposit money into a savings account, you're giving the bank permission to loan it to others. The money is still yours, and you can access it when you need it.

Interest

In exchange for letting the bank use your cash, most savings accounts earn interest. The interest rate varies based on the market and any promotional offers from your bank. For example, a bank may offer a particular interest rate for several months after you first open the account. After the introductory period, your rate may rise or fall depending on market conditions.

Interest is typically a percentage, shown as annual percentage yield (APY). It compounds, meaning that any interest your account balance earns also starts to earn interest, increasing the value of your savings.

Deposits

You have a few options for putting money into a savings account. If the account is at the same institution as your checking account, you can transfer funds from your checking into your savings account — manually or via automatic transfers. You can also set up direct deposit with your employer, depositing a portion of your paycheck into your savings account on payday.

Another option is to deposit cash or checks into the account by visiting your bank or an ATM. If your savings account is connected to a mobile app, you may be able to deposit money into the account using a mobile check deposit feature.

Withdrawals

When you need to withdraw money from the account, you have a few options. You can transfer the funds from your savings to a checking account or visit a teller at the bank to make the transaction. You may also have a debit/ATM card that allows you to withdraw cash at an ATM.

What are the pros and cons of savings accounts?

A savings account can help you prepare for life's surprises and achieve your goals, but it's smart to evaluate the pros and cons of savings accounts to make the best choice for your money.

Pros of savings accounts

When you're looking to store money for short-term savings goals, a savings account may be exactly what you need. Some of the benefits of a savings account include:

• Easy access to your money: When you tuck money into a savings account, you can usually withdraw it again quickly if you need it.
• Security: The Federal Deposit Insurance Corporation (FDIC) insures up to $250,000 per depositor per account ownership type per bank at member banks. That means if something happens to the bank, your money is safe.
• Earn interest: Most savings accounts are interest-bearing accounts, helping your money grow.
• Convenient goal setting: Savings accounts are useful tools for financial goal-setting. You can set up multiple savings accounts, one for each of your short-term goals.

Cons of savings accounts

Savings accounts aren't always the best option for your financial needs. In some cases, another option, such as a money market account, investment account or certificate of deposit (CD), is the better pick. Potential drawbacks of a savings account include:

• Withdrawal limits: Some banks limit the number of withdrawals you can make from an account, usually up to six per month.
• Minimum balance requirements: A bank may require you to keep a minimum amount in the account. If your balance falls below the minimum, you might have to pay a monthly maintenance fee.
• Lower earnings: Savings accounts earn interest, but the rate is often lower than that of a CD or money market account. You're also more likely to get a higher return from an investment account, but you risk your investments losing value.

What are the different types of savings accounts?

You can find many different types of savings accounts, with some offering higher rates or different perks than others. CDs and money market accounts are similar to savings accounts but have distinct differences to put them in their own categories. A few savings account options you may encounter are:

Traditional savings accounts

A traditional savings account can be a safe place to put your cash or save for a goal. The interest rate on a traditional savings account can vary based on the bank and the market.

Online savings account

Online savings accounts operate like regular savings accounts, but your primary method for accessing them is online or with a mobile app. Depending on the bank, you may not have any physical locations to visit when you have a question or want to deposit money into the account. Online savings accounts often offer slightly higher interest rates than traditional savings accounts.

Child, teen and student savings accounts

Child, teen or student savings accounts help younger people start saving. They may have some additional features designed to make saving fun for kids, such as educational programs or interactive features. These savings accounts often don't have account fees but usually pay a lower interest rate than regular traditional accounts. Student or college savings accounts are meant to help college students get off to a solid financial start.

IRA savings account

An IRA savings account gives you the tax advantages of either a traditional or Roth IRA, minus the investment risk. The downside is that your retirement savings may not grow as much in a savings account as they would in an investment account.

How do I open a savings account?

Opening a savings account is easy, and you may not even need to visit a bank in person to do it. Here are the steps you’ll likely follow when opening a savings account.

1. Gather your documents
A bank will typically want to see some form of ID, along with other identifying information, including:

• Driver's license or passport
• Social Security number
• Basic contact information
• Birth date

2. Shop around for the best option
You have many options to choose from when opening an account. Look for a savings account that offers these features:

• A good interest rate
• Minimal or no fees
• Low or no minimum balance

3. Apply for the new account
Most banks require you to fill out an application with your information. If you're opening a savings account online, you may get approved within a few minutes.

4. Transfer the funds
Once your bank account is open, you'll need to put money into it. You can deposit money into your savings account in several ways:

• Transferring funds from another account at the same bank
• Depositing a check or cash
• Transferring money from another bank

Savings account FAQs

If you still have questions about savings accounts, check out the answers to these frequently asked questions.

How much money can I make with a savings account?

The amount of money you make from your savings account depends on your balance and your interest rate. The larger your balance, and the higher your APY, the more money you’ll make. With a $5,000 balance and a 0.03% APY, you could earn $1.50 over one year, with interest compounding over time, assuming your interest rate stays the same and you don't add any additional funds to the account.

How much will $10,000 make in a savings account?

The amount of interest you’ll earn on a $10,000 balance in a savings account depends on the interest rate your bank pays. For example, if your APY is 0.01%, you'd make $1.00 in a year, assuming you don't make any additional deposits and your APY doesn’t change. With a 0.02% or 0.03% APY, you’d make $2.00 or $3.00, respectively.

Can I purchase online directly from a savings account?

No, you can't use the money in your savings account to shop online because the account isn't connected to a debit card. To spend money in your savings account, you'll need to transfer it to your checking account first.

How do you calculate interest on a savings account?

You can calculate the simple interest on your savings account by multiplying the balance by the interest rate (converted to a decimal point) by the time period. For example, if you have $1,000 in an account that earns 2% interest over one year, you'd multiply 1,000 by 0.02 by 1 to get $20. To calculate compound interest you'll use a more complex formula or you can use an online calculator.

How much should I keep in my savings account?

How much you keep in a savings account depends on your overall goals. For an emergency fund, the recommendation is to have three to six months of living expenses. You can start small and save up over time.

Saving for your goals

Whether you're saving for a vacation, a down payment, a kitchen upgrade or a rainy-day fund, a savings account provides a secure, accessible place to stash your cash. While it's not the best option for every financial goal, it's often the way to go for short-term hopes and dreams.

Start your financial journey with Citizens. Learn more about our savings accounts.