Everything You Need to Know About Opening a Savings Account
A savings account is a secure place to store your money that earns a small percentage of interest annually while your funds grow towards your long-term financial goals.
Everyone’s savings needs are different. Whether you’re saving for a plane ticket or house down payment, or need easy access versus wanting to stow cash away untouched, it’s important that you do a little research to find a savings account that’s right for you.
Benefits of a Savings Account
If you’re going to start diligently portioning part of your income to savings every month, you should consider finding a savings account that maximizes your assets. Fortunately, savings accounts offer a myriad of benefits to help keep your money safe and steadily growing.
Stockpiling cash subjects your money to theft and damage. Savings accounts, on the other hand, offer safety and stability. They’re a great low-risk option because they’re federally insured, meaning if the bank fails, you’re covered up to $250,000.
All savings accounts offer interest payments on your balance. This is because your money doesn’t just stay stagnant — banks lend it out and make money on the interest. While most national and local banks offer relatively small interest rates averaging at just 0.06% annually (with most large banks at just 0.01%), you can look into alternative options to traditional savings accounts like money market accounts and certificates of deposit that offer a slightly larger return on investment.
Ease of Use
If you get a checking and savings account with the same bank, it’s usually easy to transfer money between the two accounts. Most large banks offer mobile banking, and you can even consider setting up auto-transfers so you can save without even having to think about it.
Alternatives to Traditional Savings Accounts
Now that you understand the importance of having a savings account, it’s time to decide which type of account is right for your needs. Most people opt for traditional savings accounts at their national or local bank, but you don’t have to limit yourself to just one option. Diversify your savings by keeping an eye out for which accounts have the best interest rate and lowest fees. Consider talking with a financial advisor to ensure you’re choosing the account that’s right for you.
Certificate of Deposit
Certificates of deposit, or CDs, are a type of savings account that comes with a fixed withdrawal date. You can set this to be anywhere from three months to five years, so choose wisely. If you need to withdraw early, you’ll pay a penalty fee. The benefit? High interest rates — up to three percent annually. This is a great option if you know you won’t need your funds for a while.
Money Market Account
Money market accounts offer a better interest rate than a traditional savings account, averaging 0.08 to 0.11 percent. They are ideal for those who want checking features like a debit card — just be mindful of the limit of six monthly transactions that is standard for most savings accounts. For anything more than that, a regular checking account might be a better fit.
Online Savings Accounts
Online savings accounts are similar to traditional ones — without all the overhead costs. Because of this, they usually pay higher interest rates and don’t charge maintenance fees. They’re usually mobile-friendly and allow electronic transfers from your checking account.
Practical Uses for Your Savings Account
Once you’ve opened your account, you may realize you have a lot of questions around what to save for and how much to put away. The answers to these questions will vary for everyone depending on their needs and lifestyle, but here are a few of the most common uses to consider:
Living Expense Cushion
At the very least, it’s best to save enough to have a cushion for basic living expenses such as rent and bills in case you suddenly lose your job or need to take extended time off for any reason. The cushion can be anywhere from three to six months of living expenses depending on what you’re comfortable with and how much you’re able to save. After this safety net is established, you can focus on saving for other needs.
Another common use for savings accounts is to prepare for major life purchases like a down payment for a car or home. You can also use your account to save for more luxurious “wants” rather than “needs,” like a vacation or a new laptop. Remember that you’re entirely in control of when and what you spend your savings on.
We all know life can be unpredictable — that’s why it’s always smart to have a backup plan. Having an emergency fund can be a relief in cases of a car accident or medical emergency. Deciding how much to keep in an emergency fund depends a lot on lifestyle factors like having kids, pets, or student loans. Account for things like these when deciding how much to put into your emergency fund.
Savings Account Fees and Restrictions
Now that you’ve decided where and what to save, familiarize yourself with your bank’s policies. Playing by the rules will ensure that banks aren’t charging you fees that are easily avoidable.
Federal laws restrict you to six “convenience” transactions per month in your savings account. This includes things like transfers to your checking account, automatic bill payments, and checks. Don’t worry about not having access to your money — there are no limitations on ATM or in-person withdrawals.
Minimum Balance Requirements
Most large banks only require $25 to open a savings account, and most online accounts don’t require any minimum balance at all. However, if you want to avoid fees, the minimum balance requirement for most large banks is $300. Money market accounts will often require a much higher minimum balance.
Monthly Maintenance Fees
If you want to avoid annoying monthly maintenance fees, it’s important to keep the required minimum balance. Some banks waive fees for students under 18 or if you have a certain number of automatic transfers each month.
When it comes to saving money, you have options. Choosing the right account will set you up to maximize your income and achieve your financial goals. With a little bit of budgeting and planning, you’ll be able to enjoy things like better vacations, a new car, and ultimately, more financial security.
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