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What Is a Savings Account?

Savings accounts are a safe place to store cash and can earn more than 1% interest. They can also help you save for longer-term needs.
Banking, Banking Basics, Savings Accounts
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Savings 101: What Is a Savings Account?

What is a savings account?

A savings account is a place where you can store cash securely — unlike investment accounts, they are federally insured — while you earn interest on your money.

Why you need a savings account

Using a savings account creates some distance between everyday spending money and cash that’s meant for a later date, like an emergency fund or vacation savings.

Let’s take a closer look at how these accounts work, where to find the best ones and how other savings vehicles compare.

» If you’re ready to compare savings accounts, see our list of best online savings accounts, where the emphasis is on the highest interest rates available.

How savings accounts work

Unlike a shoe box beneath your floorboard — or even most checking accounts — savings accounts can help your money grow. Lending the bank money enables it to turn around and offer loans to other customers, so the bank is paying you a little interest as a thank you.

A bank relies on savings deposits to offer loans to other customers, so it pays you interest as a thank you. Online banks offer the best rates.

Although “a little interest” is all too true for most accounts, you can find higher rates at online banks; these banks don’t have to support expensive brick-and-mortar branches, enabling them to offer competitive annual percentage yields, or APYs. These same accounts tend to have low initial deposit requirements and typically don’t charge monthly maintenance fees. Other savings accounts enforce daily or monthly minimum balance requirements and charge fees when customers dip below that amount.

The money you store in a savings account isn’t quite as accessible as cash kept in a checking account. If easy access is what you’re looking for, visit NerdWallet’s list of the best checking accounts. These accounts don’t have many fees and might even earn interest.

Federal law limits the number of transfers or withdrawals from a savings account to six a month. Making any additional transfers — by check, debit card or online, for example — typically results in a fee. Taking money out through a teller or ATM doesn’t count toward this six-per-month limit.

How savings accounts can help

These withdrawal limits may be a blessing in disguise. As the name implies, savings accounts are designed to store money that you don’t need immediately but that can be accessed in case of emergency or when it comes time to book that trip or replace your current car. Keeping that money in a separate savings account can ensure that it’s there when you need it.

Savings accounts are designed to store money that you don’t need immediately. Keeping that money in a separate account can ensure that it’s there when you do.

Pairing a strong savings account with a checking account at the same bank often makes a lot of sense, and banks and credit unions that offer strong savings products tend to have top-notch checking options.

Alternatives to savings accounts

Banks and credit unions give people a couple of other savings vehicles to choose from:

  • Money market accounts, which often require a higher minimum balance and in return offer a slightly better rate. The account might also come with a debit card or the ability to write checks, but transactions are still limited to a handful per month.

» Learn more about what a money market account is

  • Certificate of deposit, or CD, which holds money for a fixed term, anywhere from a few months to a few years. This account usually offers the highest annual percentage yield; the longer the term you commit to, the higher the interest rate. Open a CD only with money you won’t need immediately, because withdrawing money before the end of the term carries a penalty.

» Read up on types of CDs

Where to find the best savings accounts

If a basic savings account serves you best, start your search by looking at online banks and credit unions. These types of financial institutions, which are heavily featured in NerdWallet’s list of the best online savings accounts, keep fees to a minimum, offer high rates and might even offer special tools to help you manage your savings.

Once you’ve decided on a bank, you can open a savings account online or at a branch, where you’ll need to provide a government-issued photo ID and other pieces of information, including your Social Security number, phone number and address.

Tony Armstrong is a staff writer at NerdWallet, a personal finance website. Email: tony@nerdwallet.com. Twitter: @tonystrongarm.

Updated Oct. 23, 2017.