What is a savings account?

A savings account is a type of bank account where you can deposit money, earn interest on your deposits and make limited withdrawals.

A savings account also offers one way to earn interest on your money without the type of risks that could come with investing in the stock market.

Because many savings accounts are insured by the government — either the Federal Deposit Insurance Corp. or the National Credit Union Administration — they can be a good place to keep your cash until you need it.

Keep in mind that interest rates on savings accounts tend to be low, so they may not be the best choice for long-term investment goals like retirement. But if you want to save for other financial goals, a savings account can be a good option.

Let’s look at why you may want to open a savings account, how it works, where you can open one and how you can make the most of it.

• How does a savings account work?
• Types of savings accounts
• Pros and cons of a savings account
• Where to open a savings account
• How to open a savings account
• Tips to start saving
• FAQs about savings accounts

How does a savings account work?

Opening a savings account is a simple process. You may be able to open one at a bank, credit union or online and deposit money into the account. Savings accounts can help separate money you want to set aside for the future from money you use to pay for day-to-day expenses and recurring bills.

A savings account can help you save for multiple goals, including an emergency fund, a vacation and a down payment for a house.

Here are some more important details to keep in mind.

Interest rates

Interest rates on savings accounts are typically low. The national average APY on savings accounts was 0.45% in June 2024, according to the Federal Deposit Insurance Corp. If you want to earn a higher rate of return on your money, consider a high-yield savings account or another type of account such as a money market or investment account.

Keep in mind that certain savings alternatives may come with minimum deposit requirements or additional fees and added risk.

Fees

Bank accounts in general may come with other types of fees that could include things like …

• Overdraft fees — You may be charged a fee if you spend more money than you have in your account, so be sure to keep track of your withdrawals.
• Out-of-network ATM fees — If you get money from an ATM that’s not in your bank’s or credit union’s network, you might have to pay a fee.
• Monthly maintenance fees — Financial institutions may charge a fee to keep your account open. You can often avoid this fee by …
  • Maintaining a minimum balance
  • Opening a checking account with the same financial institution
  • Making direct deposits of a certain amount into your savings account each month

Withdrawal limits

The Federal Reserve previously limited the number of certain types of withdrawals, transfers and third-party payments you could make from your savings account to six each month.

While the Federal Reserve eliminated that requirement in 2020, it also gave financial institutions the option to keep these limits as they see fit. Make sure to ask your bank if they impose these limits.

And keep in mind that In-person and ATM withdrawals don’t count toward this limit.

Overdraft protection

If you have a checking and savings account at the same financial institution, you may be able to link the two together. If you overdraw your checking account, the funds will be automatically transferred from your savings account to cover the transaction.

You may pay a fee for this service, but it can help you avoid declined transactions as well as insufficient funds and other fees.

Types of savings accounts

Traditional savings accounts

Traditional savings accounts are the most common type of savings account. They typically offer low annual percentage yields (APYs), but they are generally a safe place to store your money.

High-yield savings accounts

High-yield savings accounts typically offer higher APYs than the national average on savings accounts. This means you can earn more interest on your money.

Money market accounts

Money market accounts are a type of savings account that often offers higher interest rates than a traditional savings account. They may come with more flexibility to access your money, such as the ability to write checks or use a debit card.

Don’t confuse these with money market funds, which are a type of investment account that can fluctuate with the market.

Certificate of deposit

If you want to lock in your savings for a certain term, a certificate of deposit is worth considering. Typically, the higher the term, the higher the interest rate.

But keep in mind that if you withdraw your money early, you may face a penalty.

Pros and cons of a savings account

Advantages of a savings account

• Safety: Savings accounts are insured by the FDIC or NCUA up to a certain amount, which means your money is guaranteed even if the bank or credit union fails.
• Interest earned: While the interest rates on savings accounts are typically low, they can still help your money grow over time compared to keeping your money in a checking account.
• Goal setting: Keeping your money set aside from your daily spending in your checking can help you grow your savings more consciously. Think about automating your savings habit to make more progress.

Disadvantages of a savings account

• Low interest rates: The interest rates on traditional savings accounts are typically low. Consider a high-yield savings account instead.
• Minimum balance requirements: Some savings accounts require you to maintain a minimum balance to avoid fees.
• Withdrawal limits: Your financial institution may impose limits on certain types of withdrawals on a monthly basis.

Where to open a savings account

If you want to open a savings account, traditional banks, credit unions or online banks are your options.

When you’re deciding which one is right for you, consider the full picture of what the bank or credit union might be able to offer you, including things like how you prefer to access your money and how much you may be able to earn in interest.

Traditional banks

Traditional banks operate through a network of brick-and-mortar branches and may be a good option if you want to be able to go to a branch to make deposits and withdrawals or ask questions. Large banks often have more branches and ATMs than credit unions or online banks.

Credit unions

Credit unions are member-owned nonprofit organizations that offer financial products and services to their members. You must meet the credit union’s criteria — which can be based on where you live and work and what organizations you’re a part of — to join.

Credit union profits are returned to members through lower rates on loans and higher interest on savings and checking accounts.

Online

Online banks often offer products similar to what you’ll find at traditional banks and credit unions but have few or no branches. While you may be able to speak with a customer service rep if you have questions, you won’t be able to walk into your local branch for help.

How to open a savings account

Opening a savings account is a straightforward process.

1. Gather required documents. Make sure you have the documents you need to open a savings account, including a government-issued ID.
2. Complete an application. While each financial institution has its own application, the information you need to provide is similar regardless of where you apply. Typically, you must provide your name, address, contact information, date of birth, employment information, Social Security number and date of birth.
3. Fund your account. Financial institutions typically require a minimum deposit to open the account. The exact amount varies by institution. You may be able to fund your account by using your debit card or electronically transferring funds from another account.

Tips to start saving

After you open your savings account, you can use it to help you achieve your financial goals. Here are a few best practices to help you get started.

• Pay yourself first. Of course, everyone’s financial situation is different, but even if it’s saving a small amount each week this could be a first step. If you wait until after you’ve paid your bills and other expenses, you’re unlikely to have money left to save. Instead, set aside money in your savings account first, even if it’s just a few dollars.
• Automate your savings. Sign up for direct deposit through your employer and designate a certain amount of money from each paycheck to be deposited into your savings account.
• Set up an emergency fund. Many experts recommend having enough money to cover at least three to six months of expenses in a savings account in case of a job loss or other emergency.
• Savings account alternatives. If you have enough cash set aside for a rainy day and you want to boost your savings, consider opening a money market account or certificate of deposit. Both are safe alternatives to savings accounts that are also federally insured, and they typically have higher interest rates than savings accounts.

What’s next?

If you’re ready to start saving, research financial institutions to find one that’s a good fit. Make sure you understand the fees that may be associated with your account. Then check out our guide to budgeting to help you maximize the amount you save.

FAQs about savings accounts