by RAY PETRUS

What Is a Savings Account?

A savings account is a deposit account that you can open at a bank or credit union. You deposit your money in the account and the bank pays interest on the money you have deposited. You can withdraw your money at any time by filling out a withdrawal slip at a branch location or by transferring the money to a different account.

When you deposit money into a savings account, you are essentially lending the bank money. The bank takes your deposited cash and uses it for loans to other customers, among other things.

FDIC Insurance

The Federal Deposit Insurance Corporation is a government agency that insures deposits in financial accounts such as savings, checking, and money market accounts. In the event that a bank is unable to provide you with money from your account for a withdrawal, the FDIC will give you the money. FDIC-insured banks are required to pay insurance premiums, which is where the agency’s money comes from.

The FDIC was created in the 1930s after bank runs during the Great Depression caused the public to lose faith in the banking system. With the United States government backing its citizens’ bank deposits, the people could rest assured that they wouldn’t lose their money to their local bank.

The FDIC insures your deposits up to $250,000 at each bank with which you have an account.

Interest Rates

Most banks offer a savings account with interest that compounds daily or monthly. The interest will then be paid out periodically; this could be every month, every quarter, or on another schedule that the bank chooses. Keep in mind that more compounding periods allow your money to grow more quickly.

Interest paid out by your bank on your savings accounts is considered taxable income.

As of September 2021, the national average interest rate for savings accounts is 0.06%. This rate might seem incredibly low, and to be honest, it is. But that’s because savings accounts are an incredibly low-risk, high-liquidity financial tool. You’re depositing money into a government-backed account and you can withdraw your money at any time, so you’re essentially taking on zero risk. If you’re looking for higher returns, you’ll have to take on a lower-liquidity account like a certificate of deposit or a higher-risk investment like stocks. There are, however, some banks that offer high-yield savings accounts that pay several times the national average.

Interest rates on savings accounts are usually variable, meaning that they can change as the Federal Reserve adjusts interest rates. It is worth noting that interest rates have been higher in the past and will likely rise at some point in the future.

Savings Account Advantages

The characteristics of savings accounts make them a perfect place to keep an emergency fund. The interest rate you’re paid is higher than that of a checking account, but you’re not required to lock your money up for a certain period of time. The money is easily accessible, so you can always transfer it to a checking account or perform an electronic payment in the event of an emergency.

Savings Account Disadvantages

The main disadvantage of savings accounts is that, while deposited money is considered very accessible, there are restrictions in place that prevent you from using your savings account like a checking account. Firstly, savings accounts do not come with checks or a debit card; they are meant to be used for saving, not spending. Secondly, Federal Reserve Board Regulation D states that you’re not allowed to make any more than 6 withdrawals or transfers out of your savings (or money market) account per month. (This regulation has been suspended during the COVID-19 pandemic.) So, if you kept all of your cash in a savings account and only transferred it over to your checking account when you needed to spend it, you would quickly reach the maximum number of transactions allowed.

Final Thoughts

If you’re looking to open up a new savings account for your emergency fund or to save for a special event or vacation, be sure to check that your bank is FDIC-insured. Consider looking into an online bank that offers a high-yield savings account if you want to bump up your interest rate.