A checking account is a no-brainer when it comes to storing money used to pay bills or cover costs. However, if you’re looking to save money for future needs and aspirations, a savings account may be a better alternative.
Savings accounts enable you to store money in a secure location while receiving interest on your balance. Savings accounts are available via regular banks, NCUA-insured credit unions, and internet banks. If you’re considering creating a savings account, there are a few critical points to understand about how they operate.
What Is the Definition of a Savings Account?
A savings account is a bank account used to retain money that you do not need or intend to spend immediately. The latter allows you to make purchases and ATM withdrawals using a debit card, while the former does not.
Savings accounts enable you to save funds for specific reasons and objectives. For example, you may open a savings account for an emergency fund or a down payment fund before buying a home.
Savings accounts allow you to withdraw cash quickly, but they have a withdrawal limit. Until recently, Federal Reserve Board Regulation D restricted you to six withdrawals each month, which included the following:
- Transfers from an overdraft account to a checking account
- Transfers of money electronically (EFTs)
- Transfers made via an automated clearing house (ACH)
- Telephone, fax, computer, or mobile device transfers
- Telephone, fax, computer, or mobile device wire transfers
- Transactions using check or debit card
The Fed released a final interim rule in April 2020, allowing financial institutions to opt out of the six-per-month withdrawal cap. However, if you exceed the six transaction limit, your bank may continue to impose an excess withdrawal fee. The good news is that some transactions, such as ATM or branch transfers, do not count towards this limit.
Savings Accounts: How Do They Work?
Savings accounts are not extremely difficult to understand. You establish a savings account with a bank or credit union and fund it with funds. Following that, the bank will pay you interest on your balance.
You may continue contributing to your savings account via one or more of the following ways, depending on the bank:
- ATM withdrawals of cash or checks
- Deposits of cash or checks at a branch
- Transfers made using ACH from a connected bank account
- Transfers of funds from another bank account
- Check guarantee through a mobile device
- Deposits made directly
Interest rates and equivalent annual percentage yields, or APYs, vary per bank and account. The annual percentage yield (APY) is the rate of interest gained on your investment after compounding interest is taken into account.
Assume you deposit $1,000 in a savings account. You deposit $200 monthly, and the bank offers you an annual percentage yield of 0.90 percent. After one year, your total will be $3,419.84, consisting of $3,400 in deposits and $19.84 in interest. If you save, you can earn overtime.
Losing a Checking or Savings Account Balance That a Bankruptcy Exemption Doesn’t Cover
All bankruptcy filers must take extra steps to protect bank balances, ensuring that the money is protected by a bankruptcy exemption. Property is protected from creditors before and during bankruptcy under exemption rules. You’ll keep your property if an exception protects it. Otherwise, regardless of whether you file for Chapter 7 or Chapter 13, you’ll lose the money.
You’ll begin by looking into the exemptions that apply to your situation. That’s when you’ll be able to see what assets you might lose if you file for bankruptcy. If you’re like most people, you’ll discover that keeping your bank account balances safe through bankruptcy is difficult. Why? Because most states only safeguard a small amount of money, if any at all.
Check your state’s bankruptcy exemptions from your Bankruptcy Headquarters for a cash or bank balance exemption. If your state doesn’t offer one, a wildcard exemption will almost certainly be your best bet, as many of them allow you to apply it to any asset you want.
The Advantages of Savings Accounts
There are various reasons to save money in a savings account, the most obvious being the opportunity to earn interest. As the above computation demonstrates, savings accounts enable you to grow your money without doing anything additional. Although this is not free money—interest earnings are subject to taxation—it is money that you may earn passively just by saving consistently.
Additionally, savings accounts provide greater liquidity and convenience than other saving methods. For example, a certificate of deposit, or CD, is another way to save for short- and long-term objectives. Additionally, a CD account may provide a higher annual percentage yield compared to certain savings accounts.
However, there is a catch: CD accounts are time deposits, which means that by opening one, you commit to putting your money in the CD for a certain amount of time. While your cash accumulates interest in the CD, you usually cannot access it without incurring a penalty until the CD matures. On the other hand, a savings account would let you make up to six withdrawals each month without incurring liability.
Savings accounts are also a secure method to save for the future. While investing your money is another option to help it grow, investing in stocks or mutual funds carries a specific risk. On the other hand, savings accounts may provide a regular rate of return without placing you in danger of losing money.
And, unlike investments, savings accounts may be guaranteed by the FDIC or the NCUA. This FDIC (or NCUA) insurance ensures that your money is safeguarded up to a specified amount ($250,000 per depositor, per account ownership type) in a bank failure.
Savings Account Types
There are many savings accounts available, depending on where you choose to bank and your specific requirements. Here’s a quick comparison of the two.
Savings Accounts, Standard/Traditional
Savings accounts are the most often provided kind of savings account. These are available through traditional banks and credit unions.
Typically, this account earns a lower annual percentage yield. The FDIC reports that the weekly national average savings interest rate has been 0.05 percent since late August 2020. You may be charged a monthly maintenance fee or a minimum balance cost. These accounts are intended to serve as a starting point for saving.
Savings Accounts with a High Rate of Return
High-yield savings accounts are exactly what they sound like—savings accounts that provide a higher-than-average annual percentage rate. While internet banks are more likely to offer high-yield savings accounts, conventional banks and credit unions may also provide them. Internet banks may charge reduced fees for high-yield savings accounts due to their lower overhead along with more excellent rates.
Money market accounts combine the benefits of savings and checking accounts. This means you may earn interest on your balance and use a debit card to create cheques, withdrawals and make purchases.
Money market accounts may provide higher interest rates than conventional savings accounts, but they are still subject to the monthly withdrawal limit of six. You may open a money market account if you want even more quick access to your funds.
Savings Accounts for Children and Students
Students may also participate in the savings activity via special children’s savings accounts. These accounts often have an age restriction on saving; for example, you may not be allowed to create a student account if you are 25 or older.
These accounts are intended to teach children, adolescents, and students how to develop a savings habit. They may or may not yield interest and may or may not charge fees. These accounts are more prevalent at conventional banks than internet banks.
Savings Accounts with a Twist
Certain banks provide specialized savings accounts with a single purpose. Thus, you may be allowed to create a savings account only to save for Christmas or save for a down payment on a house.
These accounts are less prevalent than other types of savings accounts, and they often come with limitations. For example, if you have a Christmas savings account, you may be allowed to withdraw funds just once a year in November, just before the holiday shopping season. A down payment account may give a matching savings incentive, but only if the mortgage originated with the bank with whom the account was created.
Opening a Savings Account
A savings account may be beneficial for saving money toward various financial objectives, but it’s essential to do your homework before starting one. Otherwise, you risk having a mismatch between your savings and checking accounts.
When you’re ready to create a savings account, consider the sort of account that would be most beneficial. For instance, an emergency fund might be held in either a conventional or a high-yield savings account. However, if you’re saving money to buy a vehicle in cash, you may want to go for a money market account that allows you to write a check for the purchase.
Additionally, examine the amount of money you need to save. Certain banks may demand you to start a savings account with a few hundred or even a few thousand dollars. On the other hand, an online bank may enable you to begin saving with as little as $1.
After that, examine the fees and the annual percentage yield (APY) on savings accounts. Ideally, you should choose a statement with the best annual percentage yield and the lowest expenses. The more fees you pay, the less interest income you retain. Additionally, verify that the APY you may earn applies to all amounts. Certain banks offer interest levels dependent on your balance, which means you must save more money to get the most incredible annual percentage yield.
Finally, consider whether you’d instead save money with an internet bank or a traditional bank or credit union and the many ways you may access your savings when required. While online and mobile banking might make your money more accessible, you may also want access to ATMs or the ability to visit a branch. Examining all of your alternatives might assist you in determining which savings account is best for you.