Start Savings

Start Savings


Edited by Amy Sims


Written by Cate Deventer

A savings account can be a great place to set aside money that you’re saving and want to earn a competitive APY on, even if you aren’t sure on the time horizon for the money.

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How to choose a savings account

Savings accounts are a good option for achieving your money-saving goals. You’ll want to choose a savings account that offers a competitive annual percentage yield (APY) on your money. It can pay to choose one that either doesn’t have a monthly service fee or that has a minimum balance requirement you can meet to waive the fee.

Here are some steps to follow as you look for the best place to stash your savings:

  1. Determine what the money will be used for.
  2. Figure out when you’ll need to access the funds. Money to purchase a car in the next year might be best kept in a savings account, for example.
  3. Shop around. You’ll want to research banks and credit unions and compare rates. Check to see if there are any minimum balance requirements or monthly maintenance fees that could negatively impact you down the line. Generally, rates are highest at online banks, but it’s possible for a brick-and-mortar bank or a credit union to offer competitive yields.
  4. Determine your risk tolerance. Money that needs to be safe should be in a Federal Deposit Insurance Corp. (FDIC) account that’s within FDIC limits and guidelines.
  5. Open the savings account and deposit the funds into your account.
  6. Consider setting up a split direct deposit to automatically add to your savings.

What is a savings account and how does it work?

A savings account is a type of financial account found at both banks and credit unions. These federally insured accounts typically pay interest, but often at lower rates than other interest-bearing financial products insured by the government, like certificates of deposit (CDs).

In exchange for lower rates, savings accounts offer more liquidity, allowing for up to six types of withdrawals or transfers per statement cycle (and potentially more). That makes savings accounts ideal for stashing money you may need access to if unexpected costs arise.

Savings accounts can play a crucial role in your financial health. Unlike a CD, which forces you to lock up your money for a specified period of time, there’s no set term for maturity with a savings account. So, a savings account is a good spot to park your emergency fund. A CD isn’t a good place for emergency savings since withdrawing your money before the CD term ends will likely result in a potentially costly fee.

Who should get a savings account?

Most consumers would benefit from having an emergency fund and additional savings. Most banks make it easy by allowing consumers to open multiple savings accounts for different savings goals.

A savings account should be a part of a diverse portfolio that could also include CDs for locking away money for longer terms, as well as the best investments to build your retirement nest egg. As a general rule, savings accounts are for money that you may need in the short term and that you don’t want to expose to any risk that could cause you to lose principal. CDs are generally better suited for money that can be left untouched for one, three or five years, because CDs typically charge penalties for early withdrawals.

You’ll also want to make sure all of your savings accounts, money market accounts, checking accounts and CDs are at FDIC-insured banks, that your money is within FDIC limits and that you’re following the FDIC’s rules.

Some people may not be good candidates for savings accounts, including those who aren’t able to maintain any minimum balance requirement that may result in fees. That said, some savings accounts at online FDIC-insured banks don’t have any minimum opening deposit requirements, minimum balance requirements or monthly service fees.

Here are a few categories of people who may benefit from opening a savings account:

College savers: Saving for college is one of the biggest expenses parents face. Saving for students should be a marathon, not a sprint. An FDIC-insured savings account is a safe place to save for your child’s college education. Eventually, you might want to consider moving some money into a CD — depending on when your child is starting college.

Future retirees: A savings account is one of the vehicles that should be used to prepare for retirement and should be a part of your retirement plan.

Disciplined planners: It’s critical to have an emergency savings account. This account should be able to cover at least six months’ worth of expenses. You never know what the future will hold.

Travelers: Planning a trip can be a fun part of traveling, and you can use your savings account to create a travel budget. Set up a recurring transfer from your checking account into your savings account so you don’t forget to save for your vacation.

Future homeowners: A savings account at an FDIC-insured bank is the perfect place for your future downpayment on a home. Automate your savings to make sure you achieve your goal of homeownership.

What is needed to open a savings account?

Whether opening an account online or in a bank or credit union, you’ll likely be asked for similar information. That’s because all banks have to comply with certain rules and regulations for new account openings.

Banks will likely have some slightly different requirements for opening a savings account online, though most require U.S. citizens to provide a form of ID and a social security number. You might also need to lift any credit freezes you have set in order to open the savings account.

Here are sample requirements at three of the largest banks in the U.S. for opening a bank account:

Do you need to scan/submit your driver’s license/photo ID?

Bank of America: No.
Chase: The online application requires information provided on an ID.
Wells Fargo: ID information needs to be entered into Wells Fargo’s online application. You’ll need to go into a branch to open the account if your ID isn’t currently available on Wells Fargo’s online application, according to Wells Fargo.

Do you need to lift a credit freeze/security freeze? (If you have one)

Bank of America: No.
Chase: Yes.
Wells Fargo: Yes.

Do you need to fund the new account immediately using an existing routing number/account number?

Bank of America: No for checking and savings accounts, but yes for CDs.
Chase: No. You have 60 days to fund the account, and it will be closed if not funded within 60 days.
Wells Fargo: Yes, a deposit of at least $25 is required.

Online banks generally will have you input information from your drivers’ license or government issued photo ID. You’ll likely have to enter your social security number and you might have to lift a credit/security freeze, if you have one. Since online banks generally don’t have physical locations, you likely won’t have to provide this information in person.

Alternatives to savings accounts

A savings account might be the right account for you. But there are other options that you should consider — depending on your savings goals and time horizon for using your money.

Savings accounts vs. money market accounts

Money market accounts are savings deposit accounts that may allow limited check-writing privileges or access to a debit card.

Savings accounts and money market accounts are very similar. They’re both savings deposit accounts. A money market account is a better choice if you’d like to write checks from your savings account, in which case you’ll want to make sure the bank offers that option.

Savings accounts vs. checking accounts

Checking and savings accounts serve different roles, but it’s important to have both. Generally, checking accounts are used for ongoing cash flow needs, permitting as many transactions as needed. A checking account is typically where paychecks are deposited and where money to pay bills is kept. However, many pay very little interest or none at all. Some interest checking accounts may have high yields, but they might have caps and rate tiers limiting the balance that offers that competitive yield.

Savings accounts, on the other hand, are meant for stashing cash and typically don’t offer check-writing abilities. Their liquidity is more limited, but they typically carry a higher APY.

Here are some of the biggest differences between checking and savings accounts:

  • Purpose: Checking accounts are meant to be transactional — money can be taken out frequently with few restrictions. Savings accounts aren’t as liquid; they are meant to house your cash for longer periods.
  • Fees: Though there are exceptions, checking accounts often carry fees for services and slip-ups, such as maintaining too low of a balance or spending more than what’s in the account. Savings accounts typically charge few, if any, fees.
  • Interest: Many traditional checking accounts don’t pay interest. Savings accounts do, though the yields might not be as robust as those found on CDs.

Savings accounts vs. CDs

Savings accounts are intended to be liquid — you can add money to the balance or make a withdrawal whenever you want. Savings accounts generally earn a variable APY.

CDs (or Certificates of deposit) are for money that you’d like to earn a fixed APY on. Generally, CDs have a term that you need to keep your money in the CD for. Your bank will likely charge an early withdrawal penalty if you take your money out before the CD’s term ends.

A no-penalty CD can be the best of both worlds as generally you can withdraw your money from a no-penalty CD anytime after your first six days with the CD. 

Savings accounts vs. money market mutual funds

With a savings account, you deposit your money into an account and earn an APY. Your money is insured by the FDIC — up to at least $250,000 — if the bank is an FDIC bank.

Money market mutual funds (not to be confused with money market accounts) aren’t FDIC insured, and you purchase shares when you deposit money into this product.