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Savings Accounts 101: Everything You Need to Know

What is a savings account?

A savings account allows you to set aside money for future needs and goals while earning interest on your balance. It helps account holders store funds they don't need for daily expenses. You put money into the account, and the bank rewards you with interest on the amount you keep. 

The interest rate can vary depending on the bank and prevailing market conditions. Financial institutions typically calculate and add the earned interest to your account balance periodically, such as monthly or quarterly. You can withdraw money from a savings account when necessary. However, there may be restrictions or charges for excessive withdrawals. 

What are the advantages of a savings account?  

Savings accounts offers several benefits that make them valuable financial tools: 

  • Interest Earnings: One of the primary advantages is the ability to earn interest on your savings. Maintaining money in a savings account can help you earn “passive income” on your deposits, which is money earned with little or no effort. This income can grow over time regardless of interest rate fluctuations.
  • Low Risk: Savings accounts, unlike investments in the stock market, real estate and other products, are safe from volatility. If it is imperative that you not lose value in your investment in the short term, then a savings account will accomplish that because your balance will never go down (unless you withdraw funds, of course). It will only increase.
  • Security: When you deposit your money into a bank, the last thing you want to worry about is whether it will be there when you need it. In addition to most banks providing deposit insurance, keeping your funds in a savings account is the best way to keep your funds safe, even in times of economic volatility.
  • Liquidity: Liquidity refers to the ease and speed with which an asset or security can be converted into cash without significantly affecting its market price. You can withdraw money from a savings account anytime using an ATM or electronic transfers without incurring high fees or waiting a long time.
  • Goal Setting: Savings accounts are excellent tools for setting and achieving financial goals. Whether you're saving for a vacation or major purchase, having a designated account can help you stay focused and track your progress.
  • Auto Transfer: Many savings accounts allow you to set up automatic transfers from your checking account to your savings account, making it easier to save regularly without effort.
  • Emergency Fund: Having a readily accessible pool of money can provide peace of mind in case of unexpected expenses or financial emergencies.

How do you choose the right savings account? 

Not all savings accounts are the same. Different accounts have different features, so it is important to know how you plan to use the account to determine the right fit. Here are some key questions to think about when choosing a savings account:

What is the interest rate? After establishing your goals, comparing interest rates across different banks or financial institutions is important. Choosing a savings account with a higher interest rate can help your savings grow faster. It can also earn you more money in the long run.  A traditional savings account is ideal as you begin to save and grow your money as somewhere to store your emergency fund. Upgrading to a high-yield savings account or money market account to earn more interest could be smart as the balance grows.

What are the fees associated with the account? In addition to interest rates, carefully examining the fee structure of savings accounts is essential. Maintenance fees, minimum balance requirements, and potential overdraft charges can swiftly diminish your savings. Choosing an account with minimal fees ensures that a larger portion of your money remains dedicated to your financial future.

How easily can I access my funds? Consider how easy it will be access your funds. Are there limits to the number of withdrawals and deposits you can make over time?  Can you access your funds using an ATM or transfer electronically?  These features make managing your finances a breeze, enabling you to conduct transactions and monitor your balance from any location and at any time. 

A savings account is a critical part of your overall financial plan which is why it is so important to choose one that is in line with your goals.

Explore our savings account options with the Institution for Savings.