Couple planning their budget at home.

Savings Account: Definition, Best Options & FAQs

Scott Steinberg6-minute read
December 08, 2021

Interested in opening a savings account? We don’t blame you – it’s always a good idea to put aside extra money for unexpected expenses, or to invest in your financial future. What’s more, getting in the regular habit of socking cash away in a savings account can also help you steadily improve your financial standing over time.

In effect, a savings account not only provides you with a safe place to store your income. It also provides opportunities for your money to earn interest, allowing your savings to compound and add up with each passing month. What is a savings account exactly though, and how does it work? Where should you be keeping your emergency funds? And what features, benefits, and types of interest rates should you be looking for when considering where to stash your extra income? Let’s take a closer look at what a savings account is, why it’s important to have one, and the best account options for 2022.

What Is A Savings Account?

By definition, a savings account is a type of bank account that lets you safely store your money and earn interest on any funds contained within it.

By law, savings accounts are federally insured up to $250,000 – meaning that if your financial provider goes out of business, you still hold the possibility to recover funds, up to this maximum limit. Many financial providers such as banks, online lenders, and financial technology (“fintech”) companies offer savings account options. Note that while your local bank branch can help pair you with one, the best savings accounts come in many forms, including online alternatives as well as offerings from traditional providers such as banks and credit unions.

Put simply, a savings account offers another spot besides a checking account where you can park your money – and one where you’re encouraged to spend less and save more by watching savings grow over time. Money put in a savings account is less likely to be spent, and interest paid to you by your bank serves as a form of reward to encourage you to save for the future. Interest rates are paid to you in exchange for allowing financial institutions to temporarily hold onto and lend out your savings.

Create a Rocket Account today.

Track your credit, manage your personal finances and get ready to buy a home.

Checking Vs. Savings Account: What’s The Difference?

The main difference between a savings account and a checking account is the availability and ease of accessing your money. Checking accounts are more frequently used for daily spending and can come with debit cards or personal checks to make spending easier. Savings accounts on the other hand are a great place to park money you want to save long term and therefore is a bit harder to access. There may also be withdrawal and transfer limits per month with savings accounts.

Savings Account Pros And Cons

Savings accounts are one of the most common and basic forms of banking used by millions worldwide every day … and provide a welcome solution for those looking to store and save more money. But as with any form of bank account, savings accounts also come with various upsides and downsides. It’s important to fully review the pros and cons of various savings account options before deciding which bank and account makes the most sense for you.

Case in point: One of the biggest benefits of opening a savings account is that you can earn interest on your money. Minimum deposit requirements associated with these accounts are also often relatively low. However, depending on account features and which banking institution you choose to do business with, interest rates and earnings may prove relatively low as well. In addition, these accounts (although often free) may come with monthly charges and ongoing maintenance fees attached. High-yield savings accounts can sometimes carry fewer monthly balance requirements and monthly maintenance fees but may still come with similar variables attached.

Savings accounts are built to safely house money that you don’t need immediate access to, and help you reduce the temptation to spend it. As a result, any money that is stored and kept within these accounts isn’t always as accessible as cash that you are keeping in your checking accounts. In select cases, owners may also be subject to withdrawal limits, penalties or transfer limits, if they exceed a predetermined maximum number of monthly withdrawals or transfers. In other words, savings accounts are typically meant to be tapped into less often than checking accounts – although, of course, the money is still yours to spend as you see fit.

Pro tip: Whatever financial institution that you’re considering working with (and especially if working with an online bank that doesn’t maintain local branches or ATMs), be sure to inquire as to how transfers and withdrawals might work. Such arrangements may require you to transfer funds to a traditional bank account before money can be withdrawn, or prohibit you to using only certain partner banks’ ATMs, limiting the speed and convenience with which you can access funds.

Pros

  • Safety and security, with up to $250,000 in deposits insured by the Federal Deposit Insurance Corporation (FDIC)
  • Often free or low-cost to maintain, with minimal upkeep and requirements
  • Easy to deposit money into, where it can be safely stored for times of need
  • Savings earn interest, which allows you to grow your money and accrue added income over time
  • Provides a separate place where you can store money from checking accounts, ensuring that you’ll be less tempted to spend spare funds

Cons

  • May come with minimum balance and monthly requirements that must be met
  • Number of transfers or withdrawals may be limited within a certain time period
  • Doesn’t always provide as rapid or easy access to money as checking accounts
  • Not guaranteed to come with debit cards, checks, and other ways to make purchases in a pinch
  • Interest paid on money market accounts or other financial investments and instruments may be higher

What To Look For In A Savings Account

What criteria should you keep in mind as you consider whether to open a savings account and which provider to bank with? It’s important to deliberate several factors as you weigh your decision here, as not all savings accounts are created equally – or come with the same interest rates, terms, and conditions attached. Do your research, shop around, and speak with different service providers as you work to pick the right financial institution and account for you. A number of different factors and considerations that you’ll want to weigh when determining which savings account to choose include: 

  • Interest rates (APY)
  • Account fees
  • Balance minimums
  • Withdrawal limits
  • Transfer limits
  • Access to banks and ATMs
  • Maintenance requirements
  • Flexibility
  • Convenience
  • Customer service and support

Types Of Savings Accounts

Just as there are many financial providers – banks, credit unions, online fintech companies, etc. – who provide savings accounts, there are many types of savings accounts available as well. Note that traditional and online accounts still remain among the most popular choices with eager savers worldwide.

Traditional Savings Accounts

Traditional savings accounts represent one of the largest segments in banking today. The main benefit that they offer is their overall convenience. In essence, a traditional savings account doesn’t just make it simple to deposit cash and do business. It also makes it possible for you to step into a bank branch, speak with an actual human, and enjoy the upsides of face-to-face interaction with more personalized assistance. If you prefer working with familiar faces and having access to a neighborhood banking branch, you may wish to choose this type of account.

Online Savings Accounts

Alternatively, online savings accounts typically offer all sorts of helpful perks such as higher interest rates and lower expense charges and fees when compared with retail bank savings accounts. At the same time though, they may also provide less immediate access to money and offer less face-to-face customer service interaction. On the bright side, many are now finding ways to offset challenges associated with a lack of physical presence by offering access to networks of partner ATMs and banks, and reimbursing fees associated with using them. Benefits such as these have led to a huge surge in popularity in recent years, and online- and cloud-based banking solutions have quickly become a popular alternative to traditional savings account options.

High-Yield Savings Accounts

High-yield savings accounts are common to encounter as well. If you’re considering opening one, it may help to know that it’s a form of savings account which offers a higher annual percentage yield (APY, or interest rate) than traditional savings accounts. In effect, when it comes to savings accounts, generally the higher the APY that is offered on them, the faster your money will grow. While your APY will determine the rate at which your savings will increase, don’t forget: All forms of savings accounts provide a helpful place to park your emergency savings and grow these rainy day funds as your money compounds over time.

Health Savings Accounts

A health savings account (HSA) provides savvy investors with a means to save for medical expenses while also reducing their overall taxable income. In general, an HSA works like a personal savings account; however, monies that are saved within it can only be used for qualified health care expenses. Contributions into an HSA lower your taxable income, helping save you money at tax time, but in order to take advantage of an HSA, you must be enrolled in a high-deductible health plan. In other words, you’ll pay more for health care expenses until you meet your deductible and your insurance provider starts paying out of its own pocket.

Certificate Of Deposit Accounts (CDs)

Offering a relatively secure way to store your savings while enjoying a guaranteed rate of return, CD accounts are also a popular option for many savers. They’re essentially a form of time-deposit savings account that offers higher interest rates than most savings or money market accounts and that is issued by banks, credit unions, and thrift institutions. Under the terms of a CD, you’ll agree to make a lump sum deposit and leave these monies in the account for a predetermined period of time (for example, 6 months to 1 year). Individual financial institutions that you bank with will determine the rates, payouts, and CD terms offered, though – as well as what penalties may be imposed if you choose to withdraw sums earlier than agreed. As with savings accounts, CDs are federally insured, and considered to sit on the lower end of the investment risk spectrum compared with stocks and bonds.

How To Use Your Savings Account

Following the below best practices can help you get the most out of your savings account, no matter the type of savings account you have chosen to open.

It’s recommended that you put away 3 – 6 months’ of living expenses in savings. Money saved within this fund should be utilized only for special occasions, such as down payments on a home, vacations, or the purchase of a new vehicle.

If you struggle to save, don’t forget that even as little as $500 – $1,000 in emergency savings can go a long way towards helping you address many common household financial challenges. What’s more, the more you get in the habit of maintaining a monthly budget, cutting down optional expenses (like dining out and entertainment), and automatically placing a portion of your paycheck in savings, the faster your financial cushion will grow.

Once you’ve put away enough money to help address routine day-to-day setbacks such as a flat tire or outsized utility bill, don’t stop there either. Make a point to continue saving and growing your financial cushion to safeguard against larger concerns such as job loss or unexpected medical needs. You’ll also want to make a point to plan to put away money and save for your retirement as well.

Best Savings Accounts For 2022

 

Bank Name

Type

Benefits

Vio Bank

High Yield Online Savings

High APY, low balance, low fees

Citibank

High-Yield Savings

High APY, low fees, no minimum balance

Marcus by Goldman Sachs

Online Savings

High APY, $1 minimum, no transaction fees

Synchrony Bank

Online Savings

High APY, customer service, unlimited ATM reimbursement

Discover

Online Savings

No minimum opening deposit, no monthly fees

Barclays

Online Savings

24/7 access to funds, online transfers, easy use via app

Capital One

360 Performance Savings

No monthly fee, no minimum opening balance, high APY

Savings Account FAQs

Savings accounts often come with frequently asked questions (FAQs). We provide answers to several of the most common here.

How Can I Open a Savings Account?

Simple – start by researching financial providers online and reviewing terms, conditions, and interest rates. Your homework will quickly reveal a host of savings account providers (including banks, credit unions, fintechs, and online companies) who can help pair you with opportunities. To open a savings account, you’ll need to provide documentation verifying your identity and other personal details, submit an application, and fund the account with a financial deposit. You may also need to sign up for an online banking account and services.

How Many Savings Accounts Should I Have?

There’s no maximum limit to the number of savings accounts you can have. Experts often advise keeping separate savings accounts for different savings goals, like putting together a down payment on a house or collecting an emergency fund with 6 months’ of living expenses. Having a separate account set aside for each goal can help you more readily automate the regular transfer of money into each account (and towards each objective), track goal progress, and provide ongoing savings motivation.

Can I Lose Money in a Savings Account?

Yes and no: Generally, you won’t in the short term, but over longer-term periods, it’s possible to lose money due to taxes and inflation. For example: If inflation grows at 4%, but your money only earns 2% interest, you won’t be coming out ahead in the end in terms of buying power. Similarly, if you earn over $10 in interest on your savings account, you’ll be taxed on these monies and the government will take a portion of your earnings. Note: You’ll also want to be sure to carefully check the terms of a savings account before opening one, so as not to be surprised later by high minimum deposits or hidden fees.

The Bottom Line

Savings accounts and high-yield savings accounts rank among the most basic and common ways to store and save money. Money kept in these accounts earns interest, which can help your savings compound over time, and help you put away more cash for a rainy day.

Many financial institutions – including banks, online providers, fintechs and credit unions – offer readymade access to savings account options. But no two savings accounts are created alike: Before applying for one, be sure to do your research and shop around.

Looking to learn more about personal finance and saving? Curious about other ways that you can proactively work to help shape your financial future? Be sure to visit the Rocket HQSM Learning Center to find out more about how to make the most of your money and other ways to invest your earnings today.

Create a Rocket Account today.

Track your credit, manage your personal finances and get ready to buy a home.

Scott Steinberg

Hailed as The Master of Innovation by Fortune magazine, and World’s Leading Business Strategist, award-winning professional speaker Scott Steinberg is among today’s best-known trends experts and futurists. He’s the bestselling author of 14 books including Make Change Work for You and FAST >> FORWARD.