What Is a Savings Account?

A savings account is one of the simplest types of bank accounts available to consumers, letting you store cash securely and earn interest on your money.

Banks and credit unions offer three kinds of savings vehicles, each with varying requirements and levels of return. Knowing the differences — what’s good about them, what could be a problem — is the first step toward finding the right savings account.

The basics

Cash kept in a savings account is less accessible than cash kept in a checking account, which you generally can withdraw without restrictions. The Federal Reserve limits the number of “convenient” transfers or withdrawals from a savings account to six a month. Making too many such transfers — by check, debit card or computer, for example — typically leads to a fee. Taking money out through a teller or ATM doesn’t count toward this six-per-month limit.

While you’re keeping your money from burning a hole in your wallet, it’s earning interest in the savings account. In a sense, you’re lending the bank this money, so it can turn around and offer loans to other customers, and the bank is paying you a little bit as a thank-you.

“A little bit” is all too true while interest rates remain low. Savers usually can find the best rates of return in online savings accounts. If you prefer a local option, credit unions tend to offer higher rates than big banks.

Finding the right account

There are a few types of savings accounts to choose from, depending on your goals.

• A basic savings account usually offers a low rate, but it can keep your money safe and give you quick access to it in case of an emergency.
• A money market account often requires a higher minimum balance and, in return offers 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.
• A certificate of deposit, or CD, holds money for a fixed term, anywhere between a few months and a few years. This account usually offers the highest annual percentage yield; the longer the term you commit your cash 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.

Other things to consider

Here are some more factors to keep in mind:

• Account minimums: Accounts with high daily or monthly minimum balance requirements tend to offer better rates than those with no or lower minimums, but you can still find high yields without this requirement. Bear in mind that dipping below a minimum can trigger a fee.
• Initial deposits: Some accounts require a specific minimum amount of money to open. You don’t necessarily have to maintain a minimum balance each month, but read the terms of the account so you know what to expect.

» MORE: How to choose a bank

Opening an account

Once you have decided, you can open a savings account online or at a branch. Your earnings from interest alone won’t be enough to save for the unexpected; add to your savings with every paycheck so you’re well-prepared.

Ideally, your savings account should cover three to six months’ of expenses. If that seems like a lot, start small. In any emergency, you’ll be glad to have a cushion, no matter what the amount.

Spencer Tierney and Melissa Lambarena are staff writers at NerdWallet, a personal finance website. Email: spencer@nerdwallet.com or mlambarena@nerdwallet.com.

This article was updated. It was originally published Aug. 6, 2015.

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