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What is a savings account?
Everything you need to know about savings accounts
You’re making money. Congratulations! That’s great news for you. Now, what are you gonna do with it?
If you’re thinking about stuffing your cash in your mattress or burying it in your backyard, let us be the first to tell you — that’s not a great idea (though it does seem like it would be kind of fun, doesn’t it?) A piggy bank is a fine way to save money when you’re a little kid, but it’s not a practical plan for an adult!
What is a savings account?
A savings account is an account opened at a bank or, banking institution, that grows over time with interest. An added bonus, your money is FDIC insured, which means up to $250,000 of the money in your account would be covered if the bank failed. Sometimes, the account has a minimum balance you need to keep in order to avoid penalties (though more often, there are accounts with no minimum balance requirements) and sometimes there are limits to the number of times you can take money out of the account.
While it may seem like these are unnecessary restrictions, they have a side effect of actually helping you with your goals. They are essentially forcing you into keeping money in that account, which is good if you’re trying to, you know, save money. The final incentive to keep money in the account is the interest rate associated with the account, which will help you make money — the more you have in there, the more your money will grow from the interest. When you’re just starting out with your savings, it might not make a huge difference, but it’ll get you used to saving money, which will be a handy habit to have when you’re making more!
How do I open a savings account?
The short answer is, you gather your money, research the best account for your needs, make a choice and apply online (or in person). Here are the steps to follow:
- Compare savings accounts. Check out various banking providers, from large banks to new digital options, to see which one is right for you.
- Choose the options that are best for you. Each bank may offer different accounts with different features. Take a look at each option and choose the best one for your needs.
- Get your info together. You’ll need information, like your social security number, driver’s license or passport number, email address and more in order to apply. Get all of this together before you start your application.
- Get your deposit ready. Figure out how much money you want to deposit in your new account and get it ready, either by preparing to transfer it or by securing a money order or cashier’s check for an in-person deposit.
- Keep track of it. Download your bank’s app to keep track of your savings. Set up alerts so you know what’s happening with your money.
You have several options when it comes to finding a bank for your savings account. You could choose a large bank like Chase, a smaller local bank in your area, or a newer online banking entity like Chime. There are pros and cons to each, of course, so check them all out and see which one is right for you!
What to look for in a savings account
Here are the main features to look for when you are opening a savings account:
- No monthly fee. You want your savings account to grow, so a monthly fee would work against this goal. Find an account that has no hidden fees and saving money will be easier.
- No minimum opening deposit. You don’t want a gatekeeping account, one that’s only available to you if you have a hefty initial deposit. Find one with no minimum so you can deposit as much as you’d like.
- Automatic transfers. This is a great way to make your savings grow. Find an account that automatically transfers money from your checking account so you don’t even have to think about adding to your savings.
- Mobile check deposits. To save you the hassle of going to the ATM, choose an account that lets you deposit checks right through the app. Snap a photo of the front and back of the check and get on with your day!
- Easy withdrawal. Hopefully, you won’t have to take money out of your savings account often, but when you need to, you’ll want to be able to do it easily. Find an account that lets you take money out of an ATM whenever you’d like.
- Interest rates. Your primary way to build your savings is to add money yourself, but choosing a savings account with a high APY will also contribute to the growth of your savings. This may not be the most important stat, but it’s a good one to check out.
Savings accounts compared
Here are three great savings accounts for consideration. Read Best Saving Accounts of 2020 for more options.
|Bank product||What to compare||Link|
|✓No monthly fees|
✓No minimum balance required
✓Set up recurring transfers easily
✓Robust app with set up boosters and recommendations
|✓No monthly fees|
✓No minimum deposit to open
✓Minimum balance of 1 cent!
✓App offers real-time alerts for all transactions
✓Automatic savings feature
|✓No monthly fees|
✓No minimum to open
✓No insufficient funds fee
✓Manage account and set up notifications from the mobile app
What is APY for a savings account?
When you research a savings account, you’ll come across the term “APY”. This stands for “annual percentage yield.” This refers to the amount of money your account earns over the course of a year. The number simplifies the more complicated math involved with compound interest. Basically, if you put $100 in an account with a 1% APY, at the end of the year, you’ll end up with $101.
As you can see, your savings account won’t balloon quickly because the APY is typically pretty low. Also, some banks place restrictions on the APY, adjusting it down the more money you have in the account or only paying interest if you keep your balance above a certain threshold. Check out the small print on the APY and just remember: it’s something, but it’s not a lot.
What are some restrictions placed on savings accounts?
Savings accounts are not as flexible as checking accounts, which are primarily intended to help you pay your monthly bills (like rent and utilities) as well as other expenses. Your savings account is designed to encourage savings (naturally), so there may be restrictions on how often you can transfer or withdraw funds. Look for a savings account with $0/low minimum monthly fees/penalties.
What are the benefits of a savings account?
According to statista.com, 46% of Americans aged 18-24 have no savings. The figure dips slightly to 41% of Americans aged 25-34 who are in the same situation. That means that more than 2 out of 5 young people lack any financial cushion!
- The biggest benefit to having a savings account is it serves as an emergency fund — that is, peace of mind — to get you out of most financial scrapes. Most experts advise you to save up three months’ worth of bills. At Roost, we suggest you start with what you can. Congratulations are in order even for your first $300. Set a goal from there and add to it as you can.
- As your savings account gains ground, you earn interest and get to watch it grow. It may not be as much interest as you could see in certain types of investments (that’s a topic for another day, as it’s a pretty complex one), it’s still a solid way to park money for a rainy day and watch it grow, so you can use it down the line for a house down payment or an emergency.
What you should remember about your savings account
1. Keep track of your balance
It’s easy to set up an account and then forget about it, especially if you set up automatic transfers. But you don’t want to ignore your savings account. Check on it every so often to see how much you have in there. That way, you’ll know if you can comfortably withdraw some funds for a rainy day. It’ll also get you in the habit of monitoring your finances, which is always a good idea.
2. Pair it with the right checking account
A savings account is great, but it really comes into its own when you have a good checking account to go along with it. Often, you’ll find that banks and financial institutions offer you extra benefits if you have both your savings and checking accounts and it’s usually more convenient, although, you may find a combination of two different providers that works best for you. We can help you find the right checking account for your needs, such as the best ones for low balances, the best ones with no fees, and the best ones for people under 30! Having a checking and savings account from the same bank can even give you certain perks, like overdraft protection, potentially saving you a lot of money in the long run!
3. Try to use it for emergencies only
One of the big reasons to have a savings account is to, y’know, save money (c’mon. It’s right there in the name!). As Statista pointed out, most Americans struggle with savings and find themselves on the brink of being unable to deal with a financial emergency, so having a savings account will help set you up to deal with potential problems that can come up. So, give yourself that cushion and, even if you’re tempted, try your best to keep your hands off your savings.
Are there other good options for saving money?
There are other choices if you want to save money, and some of these typically have better interest rates than a typical savings account. You might consider a money market account or a certificate of deposit (CD) for example, but there are drawbacks. A money market account usually has a higher minimum balance and you’d have to commit to a CD for a long period of time. These are great options if you’re more financially settled, so they are definitely worth looking into. But we recommend starting with a savings account first, then moving on to other options.
Where to find a savings account
In the course of your life, you’re going to have to make some hard choices. You may want to buy something cool, like a new car. But you may also want to set yourself up for future financial goals, like buying a home.
In these cases, you’ll want to think about your options, weighing your choices. Studies show that most Americans lack safety nets or the ability to make purchases without using credit, which limits the choices they can make. And this doesn’t even account for emergencies, which we hope don’t happen, but which come up at the worst possible times.
That’s where a savings account can come in. It can incentivize saving money, keeping it separate from the funds you use to pay your bills, and enabling your money to grow via interest. Saving money is important — and not something everyone does — and starting a savings account is a great way to get started on that goal. Fortunately, we can help you start your search with our list of best savings accounts and best savings accounts for college graduates. So, what are you waiting for? Get started saving, already!
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