A savings account is an opportunity to safely tuck money away that you don’t need for routine and daily purchases. They allow you to save money for the future, whether that’s saving for college, a house, a car, or a vacation. The longer you save, the better that’s because a majority of savings accounts earn interest, which means their value grows as long as there are funds in them. It’s quite different from a checking account. But what is it, and why is it so valuable to you?
What Is a Savings Account?
Unlike checking accounts that are designed to hold money for a short period of time, savings accounts are best for holding money longer. For example, with a checking account, you may deposit your paycheck into it and then make everyday purchases from it, whereas with a savings account, you’ll deposit funds into it you may not need right now. The balance grows whenever you add more funds, and interest is applied to that balance. For example, let’s say you open a savings account with an interest rate of 1.5% and deposit $100. If every month you contribute another $100 in ten years, you could have occurred an extra $970 in interest and potentially have an ending balance of $13,070.38. With a checking account, if you have $100, in ten years, you most likely will still have $100.
You can withdraw money from savings accounts, but your goal should be to do this infrequently. Instead, hide those funds away so that they can grow in value. They can then work as emergency funds – providing you with access if you have a serious emergency – or funds you can build up to make larger purchases later. Use them to grow a down payment for a home, car, or even an extra student loan payment.
Why Do You Need a Savings Account?
Savings accounts empower you to hold money from routine access. Though you can access them through most banks and ATMs, they are less accessible than checking accounts. That means the money grows over time due to compounding interest. For parents of teens, setting them up with a savings account helps them learn how to save money over time so they can purchase items whenever they desire.
The benefits of having a savings account include:
- You’ll earn interest on the balance in your savings account. It helps you make money over time.
- It provides a balance you can tap into whenever there’s an emergency instead of turning to costly credit cards.
- Your money is protected under federal law.
- As a parent, establishing good financial habits for your kids during their teen years can teach them how to save for what they desire, avoiding credit card debt.
- Savings accounts remain easily accessible when you need to access your money.
Though you must be over the age of 18 to open a savings account at either a credit union or a bank, parents can become co-account holders with their minor children. You can also open joint accounts with a spouse or others.
Credit Union and Banks? What’s the Difference?
Just opening a savings account can be a good move, but you can do so at various financial institutions. The most common are traditional banks and credit unions. Traditional Banks are for-profit entities that commit to providing you with modern features for managing your checking and savings accounts. They usually charge industry-common fees and often pay industry-average interest.
Credit unions are a bit different. Instead of being a credit union customer, you are actually a member of their organization. Credit unions share any profits across the board to all their members. They also use profits to help provide lower interest rates on loans and better interest payments on savings accounts.
What Are the Different Types of Savings Accounts?
A number of different types of savings accounts exist. Each has a unique purpose or goal. Most people should consider a few different options before choosing one for their needs.
Standard Savings Accounts
Basic or standard savings accounts are often the most commonly used. You deposit the money you wish to save into the account, it earns interest over time, and you can withdraw the funds at any time. However, most basic savings accounts can only have up to six pre-authorized withdrawals per month, under federal law. You can access your funds unlimitedly when you withdraw the funds in person.
When choosing this account, look for:
- The highest interest rate;
- Easy access to funds through ATMs and withdrawals; and
- Low fees
Student Savings Accounts
Student savings accounts typically do not have fees associated with them. They tend to be a better option for those who plan to keep less in their account. These accounts are ideal for students who are working most of the time and don’t have a lot to deposit into their account.
When choosing a student savings account, look for:
- Wide access through ATMs with lower fees
- Low maintenance or monthly fees
Certificate of Deposit
A Certificate of Deposit, or CD, is a type of savings vehicle that requires a longer-term focus. When you open one, you’ll deposit a specific amount of money into it. That money remains present for a specific length of time. During this time, it typically grows in value at a significantly higher rate of return than you would get from a traditional savings account. However, it is harder to withdraw from earlier if you need to do so.
When choosing a CD, consider:
- What the amount of interest earned is
- The length of the CD term
- If there are any fees
- The ability to continue to roll over the CD
- The amount of deposit required if any
College Savings Accounts (529 Plan)
529 plans are a specific type of college savings account designed to help pay for college expenses. They are best set up when a child is as young as possible, as that gives them more opportunity to grow in value. This specialized savings account allows for parents – and anyone else who wishes to contribute – to put money aside for longer-term savings. They are set up per student.
There are tax savings benefits on the amount of interest earned on these accounts. They are tax-free as the value grows as well as when the funds are withdrawn for use for college costs. Keep in mind that starting one early to save for college is critical to seeing the most impact from these savings accounts.
When choosing a 529 plan, consider the following:
- Compare private and state-approved plans
- Look at the performance of the plan to see how much potential growth is likely
- Consider any associated fees
There Are Other Types of Accounts Available
Other types of accounts exist that are similar to traditional savings accounts. Here are a few more options to keep in mind:
- Online-only savings accounts are growing in popularity. Instead of a brick-and-mortar bank to go to, the funds and transactions are held electronically. This can mean lower costs and competitive interest rates.
- Specific-goal focused savings accounts are common, but they tend to be no different in their terms than standard savings accounts. Christmas funds, for example, just have a goal of helping you to save money towards those holiday purchases in an account separate from other savings.
- Money market accounts are interest-bearing account that can feel more like a savings account. It is possible to access your funds a bit easier from these accounts, within limits. If you have more to deposit into a savings account, these accounts work well because they usually pay better interest.
Finding the right savings account for you means comparing a variety of options and your goals. Everyone can benefit from having these accounts in place as they help you avoid the risks associated with debt buildup. Be sure to speak with your financial institution about these options to help determine which may be best for your particular financial situation.