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What is a Savings Account? How They Work

  • Savings accounts provide a safe place for you to grow your money.
  • Different types of savings accounts offer varying interest rates, with high-yield accounts offering the most returns.
  • Examples of banks offering high-yield savings accounts include Ally Bank, offering an APY of 4.00%, Marcus by Goldman Sachs with an APY of 4.25%, and Discover Bank with an APY of 4.10%.
  • There are many benefits to having this type of account. There are also some drawbacks, such as limited access to your funds.
  • You can maximize your savings by picking the right account, automating deposits and keeping an eye out for competitive interest rates.

An interest-bearing savings account is like a protected home for your nest egg. This is the bank account that holds your emergency fund or your child’s future college fund. But knowing the purpose of these accounts is only half the battle.

We’ve put together this expert guide to help you understand key concepts including the different types of savings accounts, the power of annual percentage yield and why opting for an insured account can save your bacon even if the economy goes awry.

Our top picks for savings accounts

What is a savings account?

A savings account is an interest-bearing account where you can deposit money and earn returns based on your balance.

The addition of interest helps separate these accounts from checking accounts, and you also won’t have as much freedom in terms of how often you withdraw money from an ATM or the bank. That’s because the cash you sock away for savings should sit there — how long it sits there and how much interest you ultimately accrue depends on your preferences and the type of account you choose.

How does a savings account work?

When you open an account intended for savings, you’ll be asked to make an initial deposit that meets the financial institution’s required minimum.

You’ll also fill out some forms, either in person or digitally, and perhaps share copies of your government-issued identification (a driver’s license is probably fine).

How interest makes your savings account work for you

Your savings account works by generating interest according to your annual percentage yield or APY. Typically, traditional accounts have the lowest rate of return, while high-yield savings accounts deliver the best rates.

Another detail to explore is how your bank compounds interest. Some compound interest daily or monthly, while others compound interest quarterly or annually. This is important to know because shorter compounding periods mean more money for you.

Say you have $5,000 to put into savings. All account options offer the same APY of 2%, but they have different compounding periods. If you made zero additional deposits, here’s how each account looks after a year:

Funding and making deposits to your savings account

You have several easy access options to make your initial deposit and add funds over time:

Before you open your account, be sure you know how often you can make transactions. Some accounts have fairly flexible terms. Other accounts are more restricted, with many banks sticking to the COVID-19 era six-per-month transaction limit. For specialty savings accounts like an IRA, you may not be able to withdraw money until retirement age without facing significant penalties.

Benefits and drawbacks of savings accounts

Before you sign on the dotted line for your new account, get to know some pros and cons of bank-backed savings vs. your standard checking account.

Benefits of having a savings account

Savings account pros include:

Drawbacks to having a savings account

Some cons of savings accounts include:

Types of savings accounts

There are multiple types of accounts you can use for your savings.

Depending on your savings goals, how much you planned to initially deposit, and your willingness to let the money sit untouched, it’s likely some account types will be a much better fit for you than others.

These are the main types of savings accounts available:

1

Standard or traditional savings bank accounts

Standard or traditional savings bank accounts are the most flexible, with low or no-fee withdrawal opportunities and access through brick-and-mortar banking locations or online. But that flexibility comes at a price, as these accounts generally have the lowest APY. (U.S. Bank: 0.01% APY, Bank of America: 0.01%-0.04% APY)

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2

High-yield accounts

High-yield accounts offer some of the best interest rates, especially when offered by online banks or credit unions with lower overhead. (Amex: 4.25% APY, Ally Bank: 4.20% APY, Synchrony: 4.50% APY)

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3

Money market accounts (MMAs)

Money market accounts (MMAs) combine the best features of checking and savings, offering moderate interest rates and the ability to access funds via ATM and make point-of-sale purchases without penalty.

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4

Child and student accounts

Child and student accounts are often fee-free and geared toward minors and college students, usually with an age cutoff of 25 years old. The annual percentage rates are usually low, but it’s a great way to learn the ins and outs of personal banking.

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5

Specialized savings accounts

Specialized savings accounts match up with specific financial goals like a vacation or your child’s college tuition. Regulated specialty accounts, such as a tax-free IRA or a 529 college savings plan, often carry penalties for withdrawing money early and/or using funds for expenses unrelated to the account’s main savings goals.

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Get to know some of the following savings accounts:

Bank APY Monthly fee Minimum opening deposit Savings Account
Barclays 4.50%-4.80% $0 $0* Learn more
UFB Direct 4.83% $0 $0 Learn more
LendingClub 5.00% $0 $100 Learn more
American Express 4.10% $0 $0 Learn more
Synchrony 4.30% $0 $0 Learn more

Figures are correct as of October 2024. Although this table is updated regularly, the availability of the savings accounts listed through our partner may vary. In this case, check with the respective financial institution for the most up-to-date information.

*Barclays offers a Tiered Savings Account with rates of between 1.00% and 4.80% depending on the amount deposited.

How to open a savings account

Opening your bank account is a simple four-step process.

  1. Choose the financial institution and type of account you prefer.
  2. Fill out the required paperwork to open a savings account and present government-issued identification as required by your bank or credit union.
  3. Make your minimum deposit.
  4. Watch your money grow and try to maintain that minimum balance to avoid high monthly maintenance fees.

Does opening a savings account affect your credit?

Opening and maintaining a savings-focused account will not affect your credit score.

Some institutions will run a soft credit check to verify the identity of the account holder, but this will not impact your score.

How to maximize earnings from a savings account

Here’s how you can make the most out of your savings:

How much should I keep in my savings account?

How much should I have in savings? If your primary goal is to create an emergency fund, you should save money equal to 3-6 months’ worth of expenses. Otherwise, transfer enough money to grow the account, but not so much that you can’t cover short-term living expenses.

Can I lose money with a savings account?

The only way you can lose money with a savings account is if you acquire more fees than your interest can cover. For instance, making too many withdrawals or not meeting minimum balance requirements could result in higher monthly maintenance fees or other penalties.

Alternatives to savings accounts

These savings account alternatives can also help you protect your money and save for the future.

FAQs: What is a savings account?

Are online savings accounts safe?

Generally speaking, online savings accounts are just as safe as those offered by brick-and-mortar banks. Just be sure the financial institution you choose is FDIC-insured and follows best practices for internet security.

How much interest does a savings account earn?

According to the FDIC, the average savings account interest rate in 2024 is 0.46%, but some high-yield accounts offer rates as high as 5%.

What type of savings account earns the most money?

High-yield accounts (Western Alliance 4.70% APY; American Express 4.10% APY; Capital One 4.10% APY) typically offer the best return on your investment, as they offer the highest interest rates.

How can I calculate the interest earned on a savings account?

The formula for calculating your earned interest is P x R x T, where P is your principal amount/starting balance, R is your interest rate and T is the number of time periods (e.g. months or years).

How do I close a savings account?

To close your account, you must first check whether all pending transactions have been satisfied. Then you can either transfer your balance to a new account or withdraw the funds entirely. Be aware that some types of accounts will issue a penalty for withdrawing funds before the account matures or is due to pay out. Finally, inform the bank in writing that you wish to close the account permanently.

About the Author

Hayley Harrison
Hayley Harrison Personal Finance

Hayley Harrison is an active personal finance contributor for LA Times Compare. She is passionate about helping consumers make informed financial decisions and achieve their financial goals by simplifying complex topics relating to insurance and personal finance.

Hayley brings first-hand knowledge of the finance industry thanks to her previous experience as a branch manager for a mid-sized regional bank and as a licensed accident and health insurance agent.

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