Let your hard-earned money work hard for you with an interest-bearing savings account. When you store your money in a savings account, you will earn interest on the value of the funds in your account. See which savings account will work best for you.
What is a Savings Account?
A savings account is a type of account where your money grows or earns interest according to the interest rate of the account. If you’re saving money for an emergency fund or a large future purchase, like a car, a big holiday, or important vacation, you could put this money into a savings account to earn interest until the time of withdrawal. The key difference between a savings and a checking account is that you may be limited on the number of transactions you can make from a savings account, which means your money will not be as accessible as it is when stored in a checking account. Additionally, savings accounts typically do not come with ATM cards.
What Do You Need to Open a Savings Account?
When you’re opening an account, first, determine what the best bank or credit union is for you by comparing what their savings accounts offer such as interest rates, minimum opening balance requirements, online banking options, fees, and/or mobile app options. If you are opening the account in person, make sure that you have a branch located near you for easy access, although some banks may allow you to open the account online or over the phone. Some banks will require you to be 18 years or older to open an account and will ask you to fill out an application form as well as submit some form of ID. Once the bank has confirmed that you can open the account, you will need to deposit the minimum amount required into the account. If you are opening a savings account with a bank you also hold other accounts with, the process may be easier, and you may get extra benefits because of this.
The interest rate is usually the deciding factor when choosing a savings account because it will determine how much your savings will grow over time, which is the main point of having a savings account. The higher the interest rate, the more money you will earn from your savings.
Guide to Choosing the Right Savings Account
What do the best savings accounts have in common?
When looking for a savings account from a bank or credit union, there are many factors to consider. However, the most common features among the best savings accounts are: high interest rates, minimal fees, compounding methods to grow your money faster, security for your account, and excellent customer service.
- Interest rates: The best savings accounts have interest rates over 1.00%, but brick-and-mortar banks tend to be close to the national average (currently 0.06%). This has led many people to open savings accounts with online banks as they can often offer interest rates above the national average thanks to their low overhead compared to brick-and-mortar banks. For example, if you have a $5,000 savings balance, choosing an account that pays 1.00% will earn you more than $50 in a year, while an account paying you the average would earn less than $5.
- Compounding methods: Another thing you should look for is a savings account that uses a compound method for calculating interest. With a compound method, interest is paid on both the initial deposit and you are earning interest on that deposit. For example, if you have a savings account that contains $1,000 and earns 10% compound interest per year, the first year the interest is calculated on the initial $1,000. The second year, the interest is calculated on $1,100 ($1,000 + 10% interest earned or $100). The following year, the interest is calculated on $1,210.00 ($1,100 + 10% interest earned or $110) and so on. Compound interest can be calculated daily, weekly, monthly, or annually depending on the bank, but the more frequently interest compounds, the faster it grows.
- Security: Savings accounts are generally considered low risk, but you should always make sure your account is at an FDIC-member bank so that your deposits are insured by the Federal Deposit Insurance Corporation up to the maximum amount allowed by law.
- Customer service: Even with the best features in the world, without reliable, friendly customer service that treats you well, banking can be a nightmare. Additionally, looking for features that make banking easy and convenient as possible for customers (mobile banking, online account access, convenient locations, etc.) is another factor in customer service.
Why should I care about the best savings account rates?
Quite simply, the better the rate, the better advantages you have for growing your savings. The Annual Percentage Yield, or APY, refers to how much interest you earn on a deposit during a year, taking into account the effect of compounding interest. It’s important to ask if the APY comes with fees or other requirements, or if the rate your bank offers is an introductory rate that is great at the beginning but won’t stay competitive. For the best rates, you may want to consider an online bank. Some of the best online savings accounts are: Ally Bank, Capital One, Chime, Varo, BBVA, CIT Bank, and SoFi.
What monthly fees do savings accounts usually have?
Most online savings accounts don’t charge fees but some traditional bank savings accounts do. Typically these are fees related to going over a transaction or withdrawal limit, minimum balance requirements, or a monthly service fee.
Is my money safe in a savings account?
Yes. Savings accounts are guaranteed not to lose money as long as it is insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration.
Do the best savings account rates change over time?
Absolutely. That’s why it’s important to regularly monitor your savings account and its interest rate to make sure it’s working for you. It’s good to compare rates every year or so in case you want to find a better rate and change banks.
How often do interest rates change?
Banks and credit unions generally don’t change savings rates on an hourly, daily or even monthly basis. In fact, it’s common to see APYs remain the same for several months. It’s important to note, however, that rates are variable and theoretically can change at any time. Many banks will change their rates based on what their competitors are doing, so you may often see groups of banks increase or decrease their APYs at around the same time—especially if the Federal Reserve recently hiked or cut rates, as with the emergency rate cuts of March 2020 in response to the coronavirus pandemic. As a best practice, it’s good to check out the best savings rates on a regular basis (at least once a month).
Savings account terms you need to know
- Interest: Money that a bank pays into an account over time.
- Compound interest: Compound interest is the interest you earn on both your original money and on the interest you keep accumulating (typically daily or monthly). Each time interest is calculated and added to the account, the larger balance earns more interest.
- Annual percentage yield: The annual percentage yield, or APY, is the amount of interest an account earns in a year. The calculation is based on the account’s interest rate and the number of times interest is paid during the year.
- The Federal Deposit Insurance Corp: A government-run organization that insures customers’ bank deposits up to $250,000 if the bank fails. The National Credit Union Administration is the equivalent for credit unions.
- Routing Number: A nine-digit number that identifies your financial institution.
How can I earn high interest rates besides a savings account?
If you’re looking for better interest rates than a traditional savings account offers, you have a few options.
- Money market accounts: A type of savings account that typically requires higher minimum balances; some even offer check-writing options.
- Certificates of deposit: With these accounts, you are required to hold your balance for a specific period of time (typically between one to five years) in exchange for a higher interest rate. If you withdraw money before the required period ends, you’ll have to pay a penalty. CDs are also covered by FDIC insurance.
- Mutual funds: If you have a 401(k) through your job or an individual retirement account, or IRA, odds are you are putting some of your money in mutual funds. These are a type of investment that holds a little bit of many different types of stocks. Mutual funds are not covered by FDIC or NCUA insurance, and you can lose money on them — but you’ll also typically earn a higher rate of return than you would on a savings account. They’re best for long-term savings goals, such as retirement.
Is savings account interest taxable?
Yes. Technically, all savings account interest is taxable, but this only applies to interest earned that is greater than $10 so this is usually only applicable for high yield savings accounts.