You’ve decided to set some money aside for a rainy day. You want to keep it somewhere until you need it. You consider your options.
A piggy bank? Too childish (and, let’s be honest, it can only hold so much).
Under your mattress? It could be fun to sleep atop all your wealth like a dragon on its hoard, but it could also be lumpy and uncomfortable. Plus, it’s not really the safest spot.
A checking account? Your money will stay safe there, but it won’t do much else. Put it in a savings account, however, and it can earn extra money for you. Here’s how.
What Is a Savings Account?
A savings account is a deposit account that earns interest. It’s a good place to park your money for a short period since it keeps your funds accessible. Savings accounts are ideal for short-term goals like building an emergency fund or saving for a vacation.
For longer-term goals like saving for retirement, you’re better off opening a retirement account like a 401(k) or an IRA. You can’t access these funds as easily, but they earn more interest in the long run. They also reduce your taxable income.
Savings accounts also separate your savings from your day-to-day spending funds, which are better off in a checking account. By keeping your savings in a different account, you’re less tempted to tap into them.
How Savings Accounts Work
Like checking accounts, savings accounts have a routing number and account number. You likely won’t receive checks for your savings account, but you can use these numbers to send payment from your account.
You can deposit funds into your savings account anytime by visiting a bank branch, using mobile check deposit on your bank’s app, or placing a bank transfer. You can withdraw funds at any time by bank transfer or visiting a branch. Some accounts come with a debit or ATM card so you can deposit or withdraw cash by ATM, but that’s not typical.
Some banks restrict you to a set number of monthly withdrawals or transfers. If you go over, you incur charges. The typical limit is six transactions, a holdover from a federal limit no longer in effect. Other banks allow an unlimited number of withdrawals.
If you have a checking and savings account with the same bank, you can link them to enable transfers between the two accounts. One easy way to ensure you regularly save money is to set up automatic transfers from your checking to your savings account each payday.
Savings accounts are protected by FDIC insurance. That means your money is safe up to $250,000 should your bank fail. The average annual yield, or APY, depends on the account type (more on that below).
Types of Savings Accounts
Different types of savings accounts are better for different purposes. Opening more than one savings account can help you keep the money for multiple savings goals separate so they’re easier to track.
- Best For: Stashing your money for short-term goals
This is the default savings account option, most often found at brick-and-mortar national, regional, and community banks. Most traditional savings accounts pay interest, but the rates are much lower than other savings options. For example, the average APY on a traditional savings account is under 0.50%.
That makes this type of account best for short-term goals like building an emergency fund. If you want to save for a longer-term goal, you’re better off choosing an account with higher yields.
- Best For: Maximizing your interest
A high-yield savings account is the next step up from a traditional one.
The best high-yield savings accounts earn 4% APY or higher. While some traditional banks offer this type of account, you’ll find the highest rates with online banks. You won’t be able to visit a physical branch with this kind of bank, but you’ll likely enjoy lower fees in addition to the primo interest rates.
- Best For: Keeping business and personal savings separate
If you’re a small-business owner, entrepreneur, or freelancer, you need a business savings account. It keeps your business finances separate from your personal finances, making accounting easier and protecting you from an IRS audit. Just don’t expect super-generous yields.
- Best For: Kids, teens, and young adults
Some savings accounts are designed for specific demographics. These are:
- Accounts for kids under 18
- Accounts for high school students
- Accounts for college students
These accounts often have lower minimum deposit and balance requirements and offer educational resources to help account holders learn how to manage their money. They’re an excellent way for younger savers to begin their savings journey.
How to Open a Savings Account
You can open a savings account at a brick-and-mortar bank, credit union, or online bank. A traditional bank might also allow you to apply online.
You’ll need to provide:
- Your full name, date of birth, and Social Security number
- A government-issued photo ID, such as a driver’s license or passport
- Proof of address, such as a utility bill or mortgage statement
Depending on the bank, you might also need to make an initial deposit. Most banks have relatively low minimum initial deposits, say $100 or less.
Savings Account FAQs
If you’re still not sure whether a savings account is right for you, see below for answers to the most common savings account questions.
What’s the Difference Between a Savings Account & a Checking Account?
A checking account is best suited for everyday transactions, like depositing your paycheck, paying monthly bills, and covering your other day-to-day expenses. A savings account is best for storing your money for short-term goals and ensuring you have enough on hand in case of an emergency.
What’s the Difference Between a Savings and a Money Market Account?
A money market account typically has higher yields than a savings account. It also allows you to access your funds by check and debit card, making it a sort of savings/checking account hybrid.
On the negative side of the ledger, money markets usually have higher minimum balance requirements than savings accounts. Plus, the easier access to your funds could mean you dip into a money market account more.
How Much Money Should I Have in My Savings Account?
Experts recommend keeping at least three to six months’ worth of living expenses in your emergency savings. If you want to be extra safe, 12 months is even better. How much you deposit towards other goals, like a new car or a wedding, is up to you.
Is the Interest My Savings Account Earns Taxable?
Yes, the interest you earn from your savings account is taxable. Your bank will send you IRS Form 1099-INT at the end of the tax year, telling you how much interest you’ve earned — but only if you’ve earned at least $10.
However, you must report all interest you earn on your tax return, even if it’s only a few cents. How much tax you pay depends on your tax bracket.
A savings account is a crucial part of your money management plan. When comparing account options, consider:
- Fees, like minimum balance and maintenance fees
- Interest rate
- Digital features
- The purpose of the account
- Account-opening bonuses and other promotions
To guarantee you set aside money regularly, combine your savings account with a savings app like Chime or Acorns. These apps make savings automatic, removing any chance you miss your savings goal because you “accidentally” spent the money.