What Is A Savings Account And What You Should Look For In A Savings Account?
What Is A Savings Account And What You Should Look For In A Savings Account?
- By: Frank Makrides
- Updated on October 16, 2020
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A savings account when used properly can help in not only building wealth through interest earned, but it can create a vehicle of money storage that can later be deployed for your investments. Today more than ever the lines are blurred between checking, savings, money market accounts are more. With new technologies, online banking and digital banking services it is more necessary than ever to understand what each of these financial vehicles are and how to properly use them to achieve your financial success.
What is a savings account?
A savings account simply put is a bank account that has a limit on the number of withdrawals you can make over a given period.
Think of this account as a place that you can store your money and hopefully earn some interest over time based on the amount of money you have in your account. There are vehicles within banks that do link checking and savings accounts together when needed for different services like internal transfers, high-interest offers and more. In general, savings accounts are not transactional accounts used for frequent payments, that’s what checking accounts are for.
How to open a savings account?
To open a savings account, you typically need a government form id, proof of address and a tax id, your social security number. Today this can sometimes be done all through a mobile app and without any human interaction whatsoever, it’s pretty amazing. I have found that account approval sometimes is pretty instantaneous, especially if it’s an online bank.
Opening a savings account for a student or a minor?
If you’re a minor or a student you would typically need proof of enrollment at your qualified school or you might need a parent or guardian to cosign. This might make the account creation process sometimes a bit more complicated but you should still be able to open an account relatively quickly.
Checking, savings, CDs and money market accounts in the United States are protected by the Federal Deposit Insurance Corporation (FDIC). Click here to learn more information.
When to use a savings account over a checking account?
Savings accounts are ideal for a lot of different purposes. They could be used to store funds away for major purchases such as a down payment on a home, an investment property, a car purchase, transfer of funds to a brokerage account for investments, transfer to a retirement investment account and also for emergency savings in the event when you need money for an unforeseen purpose.
Please click on the FDIC guide on “Learning Bank – Checking & Savings Accounts“
Certificate of deposit savings account
A certificate of deposit or a CD is a special type of savings account. These accounts typically provide higher interest rates than a traditional savings account but they have specific lockout periods in exchange for those higher rates. For example, you could have a one-year CD, at that one-year point, or the maturity date, you can then have access again to your funds with the promised accrued interest. If you decide to access the funds in the CD any sooner than the maturity date, you would typically incur an early withdrawal penalty as stipulated by the bank’s terms for that particular CD. CDs are great if you have a clear plan and goal for your savings, with the intent of accessing those funds in the future for a given purpose.
Online savings accounts
If you don’t have the need for large regular cash deposits you should definitely consider online savings accounts over traditional local bank offerings. Their overhead is so much lower than traditional banks and they pass that savings on to you in the form of enhanced, lower-cost goods and services. I have never had an issue that I couldn’t resolve through the phone, online chat or email with an online bank. Their banking technology stack is also typically far superior in many ways to your traditional local bank. This can be seen in industry-leading mobile applications, ways to transact and ways to receive immediate support digitally. They also have a lot of smart and intelligent features built in to help you save more and provide you insight into your spending habits. Some of my favorite enhancements are integrated budgeting tools, setting goals and spending alerts, so I have a pulse of what’s going on in my accounts. The best part of all is that online banks usually offer no-fee checking accounts, higher interest rates and bonuses to new customers as they’re aggressively growing and expanding their customer base. That is great for all of us looking to get the most out of our money today.
Please click on the link to the free “Tips For Safe Banking Over the Internet” guide from the FDIC, Federal Reserve and Office of the Controller.
Linked checking and savings account options
This is an interesting offering that more and more banks are offering. Typically, they look at all the funds deposited across all of your accounts, whether they are checking or savings and provide you services based on the total amount across all accounts. What this means if all the money across all of your account types crosses a certain threshold, you could receive additional free banking services and possibly higher interest rates on your funds. They could also allow you to in some cases to tap into your savings as if it were a checking account virtually if needed, by transferring funds over to your checking account to make on-demand payments. You should at least be aware of these options and if they’re something you would want or need. Consider these options when shopping around for bank savings options.
Savings account interest rates, promotions and offers
It doesn’t hurt to ask what all the perks are prior to opening your savings account and parking your hard-earned money there. Savings account interest rates are usually higher than their checking account counterparts, so be sure to take advantage of them if you have extra savings. Some banks do offer introductory rates and others offer high-interest rates for the first $1000 of deposit for example.
Bank accounts, checking, savings, CDs and money market account interest are subject to taxation. Please click the link to the IRS website for additional information.
Things to look out for
Check with your bank on how many transfers you can make in a given period from a savings account, internally and or externally without incurring a penalty. This is critical, especially if you plan on moving funds around from time to time. You should plan any regular funds transfers and always leverage a checking account for those on-demand transactions so that you do not incur any penalties on your savings account. When opening a CD, make sure you are comfortable with the terms of the CD, including the interest, maturity date and potential penalties for early withdrawal.
If you want to take the guesswork out of it, the two financial institutions below, Axos Bank and Chime are by far the best two options depending on your needs. If you want some of the highest interests offered in banking today, then check out Axos Bank. If you’re looking for all the bells and whistles from an online banking standpoint, then check out Chime. You can’t go wrong with either choice.
#1 rated high interest checking & savings
#1 Rated For High Interest Checking & Savings
After researching banks nationwide for high yield savings and checking accounts, Axos Banks tends to always be close to the top. Their technology and online banking products are amazing as well. If you want high interest accounts, modern banking services and some of the best banking technology out there, then you have to check out Axos Bank.
#1 rated for online & automated checking & savings
#1 Rated For Online & Automated Checking & Savings
If you’re looking for banking with no fees and automated savings then you have to try Chime. They offer no hidden fees like monthly fees, overdraft fees or minimum account balance fees. They also offer a service to get you paid up to 2 days early through direct deposit. With Round Up, you automatically transfer spare change to the dollar into your savings account. Try Chime today.
Summary
Make sure you shop around both your savings and checking account needs. Ideally, you want your bank or financial institution to maximize your money earning potential. See what options the bank has for high-interest rate introductory offers, linked accounts with high interest, digital and mobile banking services. Be sure to shop around. Always take into consideration your current and future savings goals and needs.
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Frank Makrides
Is a former financial technology industry executive, licensed realtor, real estate investor, an award-winning speaker, has been published, holds multiple patents and is passionate about all things personal finance and entrepreneurship. He is also a proud husband and father of 2 amazing children.
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