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

Key takeaways

A savings account allows you to set money aside for short-term savings goals or an emergency fund.
Most savings accounts earn interest in exchange for giving your financial institution permission to use your money to loan to other people.
Savings accounts give you easy access to your money, but they also often have withdrawal limits and minimum balance requirements.

When you start earning money, you need a place to put it. A checking account is great for the cash you need for your daily life, but once you start to develop a little nest egg, it's useful to put it in a savings account. A savings account keeps your cash safe and earns interest, allowing your money to grow.

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 or 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. 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 the bank. 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. You may also have an 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 not always the best choice for your money.

Savings account advantages

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.
Insurance. 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.
Interest-bearing. Most savings accounts earn interest, helping your money grow.
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.

Savings account drawbacks

Savings accounts aren't perfect. In some cases, another option, such as a money market account, certificate of deposit (CD) or investment account, is the better pick. The drawbacks of a savings account include:

Withdrawal limits. Some banks limit the number of withdrawals you can make from an account, usually 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 need to pay a monthly maintenance fee.
Not the highest earnings. Savings accounts earn interest, but the rate is often lower than that of a CD account or money market account. You're also more likely to get a higher return from an investment account but with the risk that your investments could lose value.

What are the different types of savings accounts?

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

Regular savings account

A traditional savings account can be a safe place to put your cash or save for a goal. The interest rate you may see on a regular 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 way of accessing them is online or with a mobile app. Depending on the bank, there may not be any physical locations to go to when you have a question or want to deposit money into the account. Often, online savings accounts offer slightly higher interest rates than regular savings accounts.

Child, teen and student savings accounts

Child or teen 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. Kids' or teens' savings accounts often don't have account fees but usually pay a lower interest rate than regular savings accounts. Student or college savings accounts are meant to help college students get off to a solid start financially.

IRA savings account

You can use a savings account for retirement. 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.

Gather your documents
A bank will typically want to see some form of ID, such as a driver's license or passport. You'll also need your Social Security number, basic contact information and birthday.
Shop around for the best option
You have many options to choose from when opening an account. Look for a savings account that offers a good interest rate and has minimal or no fees. You may also want to pick an account that doesn't require a minimum balance.
Apply for the new account
Most banks require you to fill out an application with your information. If you're opening an account online, you may get approved within a few minutes.
Transfer the funds
Once your bank account is open, you'll need to put money into it. You can do that by transferring funds from another account at the same bank, depositing a check or cash or transferring money from another bank.

Savings account FAQs

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 savings, you'll need to transfer it to your checking account.

How do you calculate interest on a savings account?

You can calculate the interest on your savings account by multiplying the balance by the interest rate 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.

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.

The difference between a checking vs. savings accounts

Checking accounts are meant for everyday spending and let you easily access your cash through a debit card, checks or an ATM. Savings accounts help you save for a future goal and typically earn interest.

Money market vs. savings accounts

Both savings and money market accounts earn interest, but the amount of interest varies based on the account you use.

Do savings accounts have routing numbers?

A routing number is a nine-digit code assigned to a bank. If you want to set up direct deposit to your savings account, you'll need the bank's routing number and the savings account's account number.

Disclaimer: The information contained herein is for informational purposes only as a service to the public and is not legal advice or a substitute for legal counsel. You should do your own research and/or contact your own legal or tax advisor for assistance with questions you may have on the information contained herein.