What Is a Savings Account?

A savings account is a safe place to store your money while it earns interest. 

Savings accounts are offered by many both online and brick and mortar financial institutions. They are also insured by the FDIC for up to $250,000, making them a safe and secure place to keep your money.

Steps for Opening a Savings Account

Depending on the financial institution, you can open a savings account online, in person, or over the phone. The process of opening a savings account should look something like this: 

  • Have your identification information and contact details ready.
  • Read the terms and conditions and make sure you’re comfortable with the savings rate. 
  • When you find the account you want to open, fill out the provided application. 
  • Choose the deposit amount and provide information for accessing these funds. 
    • Note: Some institutions will have a minimum deposit and minimum amount you’ll need to keep in the account at all times. Be sure this is appropriate for your current financial situation. 
  • Submit the application. 
  • The bank will then verify your information and accounts (for the deposit) 
  • Once verified, your account will be opened. 

Checking vs. Savings Accounts

Checking vs Savings Accounts

A checking account and savings account each serve different purposes for managing money. A checking account is best for daily transactions and ATM withdrawals. It’s an account that handles the frequent in and out of cash with minimal fees unless overdrawn. 

Savings accounts often have limits to the number of transfers and withdrawals you can make each month, so they’re not suited for daily use. Instead, a savings account offers a great way to earn interest on your money while you save for your next financial goals.

Types of Savings Accounts

Types of savings accounts

There are several types of savings accounts, and understanding what each one can offer will help you make the best choice for storing your hard-earned money.

High Yield Savings Account

A high yield savings account offers a higher-than-average savings rate – you can even find high yield savings accounts with rates as high as 1.50%. Because these accounts offer higher rates, it makes them an ideal place to keep an emergency fund.

Health or Medical Savings Account

A health savings account (or HSA) is a tax-free savings account that can be used to cover medical expenses. 

When you put money into the HSA account through an employer, it isn’t taxed and the money used on eligible medical expenses is also tax-free. HSA contributions will lower your taxable income, making it a savings account with major tax benefits.

Health Savings Account Rules

HSAs are connected to high deductible health plans (HDHP) and are often offered through an employer. However, if your employer does not offer one – and your health plan is still considered a HDHP by the IRS – then you can open an HSA independently.

Can I Open an HSA on My Own?

Yes, you can open a health savings account (HSA) if you’re part of a qualified, high-deductible health plan (HDHP). You can use the HSA funds to pay for approved medical expenses like deductibles and copays. HSA funds can’t, however, be used to pay for insurance premiums. 

For more information regarding the requirements for an HDHP, check healthcare.gov.

Health Savings Account Limits for 2020

Each year, you can put money into the HSA up to the limit set by the IRS. In 2020, the limit for individuals was $3,550 and the limit for individuals with family coverage was $7,100.  The catch-up contribution limit for those over age 55 was an additional $1,000.

Your funds in the HSA roll over every year, so you never need to worry about losing your money.

Online Savings Accounts

Online savings accounts are typically offered by online-only financial institutions. The lowered business costs (from avoiding a brick and mortar location) allow for even higher interest rates for patrons’ savings accounts. It’s common for high-yield savings accounts to be with online-only banks.  

Despite a lack of physical location, your funds can still be easily accessible with transfers, debit cards, and even checks.

Joint Savings Accounts

A joint savings account is opened by two or more individuals. All individuals on the account have equal access and ownership of the funds. Joint savings accounts can be a great way for you to pool money together while in a relationship. 

It should be noted that “joint” isn’t only applicable to regular savings accounts: You can also have a joint high-yield savings account.

Business Savings Accounts

A business savings account allows you to store money for future business expenses or transactions. It’s especially common to keep your quarterly taxes in a business savings account until they are due. As a business owner, it’s always a good idea to keep your personal accounts separate (this includes savings).

College or Education Savings Accounts

If you are saving for your child’s future education, consider a 529 plan. These are savings accounts that allow you to save money for future college tuition. 

Almost every state offers some kind of 529 plan to save for your child’s future. That said, you need to be certain that your child plans to go to college because there are restrictions on how the funds are used. If you are concerned about how much you can save for college, don’t fear. You can develop a savings plan for college no matter your income level

There are two types of 529 plans:

College Savings Plan

Money is deposited into an account through which investments are made (typically mutual funds). This money can be used for higher education expenses including tuition, as well as room and board.

Prepaid Tuition Plan

Money is deposited into an account to earn interest that’s used for future tuition at any state public college. The savings rate is locked in when you open the account and start saving. There are also pre-paid private college 529 plans, but these funds can only be used at a private college in the future.

Kids Savings Accounts

Opening a savings account for your child can be a great way to teach them about money and help them grow a nest egg for their future. 

Kids savings accounts can only be opened as a joint account with an adult. This means that both the adult and the child will have access to the funds. At some banks, individuals can have their own login for the online portal. Kids savings accounts are designed this way to allow adults to supervise while providing the child with a certain amount of autonomy.

Choosing the Best Bank for a Savings Account

As you review the types of savings accounts , consider the following: 

  • How you want to use the account. 
    • Do you plan to move money around or let it sit there for a year or more?
    • Do you need immediate access with a debit card? 
    • Do you plan to save for multiple goals in one account? 
  • The interest rates the account can offer you 
  • The terms and conditions to look out for: 
    • Minimum required deposit 
    • Minimum required balance 
    • Required monthly deposits 
  • Any monthly maintenance fees

What fees exist in traditional savings accounts?

The most common fee on a traditional savings account is the monthly maintenance fee. This is typically $4-$5 a month. Many traditional savings accounts will also have a minimum balance requirement and minimum monthly deposit requirement. If these are not met, you may be met with another fee. That is why it’s essential to read the terms and conditions. 

The best savings accounts are accessible, have very few fees, and high-interest rates.

Everything You Need to Know About Saving Rates

It’s important you know how savings account rates can work for you and your money.   Below we answer these questions so you can choose the best savings account for your needs.

How Does Interest Work on a Savings Account?

When you open a savings account the bank pays you money for keeping your money with them. The amount they pay you is based on an interest rate (also called a savings rate). They reward you in this way because they can use the money kept in the savings accounts to make loans and charge a slightly higher interest rate.

Average Savings Account Rates

Savings accounts reward you for keeping your money stored away by earning interest. Interest rates on savings accounts have a wide range depending on the type of account you open. 

That said, the FDIC reports the average rate for regular savings accounts is 0.06%. It might be tempting to just open regular savings at your current bank or credit union, but in order to find the best savings rate, you should shop around and look at MMA or high yield savings accounts.

How Much Interest Will I Get on $1000 a Year?

This depends on the interest rate that your savings account offers you. For example, if you made an initial deposit of $1000 into a regular savings account – with the average interest rate of 0.06% – in 12 months, you’d have $1000.60. Your money wasn’t earning much. 

However, if you made the same initial deposit into a high yield savings account – with a savings rate of 1.55% – after 12 months, you’d have $1015.50. 

Shop around for the bank that offers the highest savings rate for money that’s left alone for a year or two.

When Would a Savings Account Be the Best Investment to Earn Interest?

A savings account is a great option for earning interest on money you’re saving for short term goals. This could be an emergency fund or the down payment for your next home. A general rule of thumb is to use a savings account for cash you will need on hand in the next 2-3 years.

Savings accounts are not a good investment option for long-term financial goals like retirement. In this case, you want to look into a diversified portfolio that will offer much higher returns over the long run than a savings account. 

Best Banks for Savings Accounts

Below are the best banks for savings accounts based on the interest rate they currently offer. 

BankRate**Type of Savings
Prime Alliance Bank"1.25%
1.34% for $10,000 or more"Personal savings account
Axos Bank by Nationwide1.50%High yield savings account called the "My Savings" account
UFB Direct Bank1.51%High-yield savings account and the MMA have the same savings rate.
Fitness BankUp to 1.49% (based on steps)Personal savings account
CFG Bank1.50%High yield MMA
Citi Bank1.40%High yield savings account
SFGI Direct1.36%High yield savings account
Live Oak Bank1.35%High yield savings account
CIT Bank1.25%-1.00%High yield savings account

** Rates last checked on 06/08/2020. For current rates, please check with each bank.

Money Market vs Savings Accounts

Money market accounts (MMAs) and savings accounts are great places to set aside your emergency fund money while earning interest at the same time. MMAs are a type of savings account that have a few checking features (like being able to write a check and using a debit card attached to the account). They tend to be more accessible than your regular savings account. 

Both MMAs and savings accounts are FDIC insured, making them safe and low-risk for cash you may need to access quickly. 

MMAs do carry one major advantage to regular savings accounts: They typically offer a much higher interest rate. They may also come with a high minimum balance requirement to avoid fees, so always review the terms and conditions before you jump into opening one.  

 

Savings Account Interest Calculator

To make your financial goals a reality, it’s important to know how much you need to save and how much your money will grow. For example, if you want to save $30,000 to use as a down payment on a home, you need to be able to:

  •  Calculate how much to save each month 
  •  Determine how much your money will grow over time (based on the interest rate) 

This is easy to figure out thanks to the savings account interest calculator at MyFinance. Run your numbers to compare savings accounts and make a plan for your next savings goal. 

 

Further Reading

For an in-depth look at different types of savings accounts and how they can work for you we recommend you check out: 

Ask the Experts Everything You Want to Know About Saving

InvestingAnswers is on a mission to help consumers build and protect their wealth through education. That is why we have experts answering your pertinent questions at the end of each article.

How much money should I keep in my savings account?

A fully-funded savings account is the value of 3-6 months’ expenses. You can find out what this number is by calculating your expenses for one month and multiplying that by the number of months you want to save for. 

Savings accounts can have multiple purposes. For example, you might have one for an upcoming trip or one for the new water heater you know you’ll need soon. Your emergency fund is arguably the most important savings account to keep fully-funded.

Do I have to report my health savings account on taxes?

Yes, you will report your HSA contributions on your taxes each year. You report contributions on Line 12 on Schedule 1 of Form 1040. By adding this to your taxes, you can lower your taxable income. To find out what goes on this line you can fill out form 8889 from the IRS.

Will my savings account affect my financial aid?

It depends. FAFSA calculates the Expected Family Contributions (EFC) by taking the income and assets of the parents for dependent students into account. This in turn can reduce eligibility for need-based financial aid (e.g. Work-Study, Direct Subsidized student loans). Still, this shouldn’t stop you from saving money for college if you can – especially if this means you can avoid student loans. 

To see where you fall for EFC contributions you can check the 2019-2020 EFC sheet.

Can you lose money in a savings account?

Savings accounts are FDIC insured up to $250,000. You can’t lose money unless you have a deposit of more than $250,000.