What is a savings account?
Learn what a savings account is, how it works, and how it differs from a checking account, including APY, compound interest, fees, and withdrawal limits.
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Summary
A savings account is a deposit account that helps you save money, earn interest, and keep funds separate from everyday spending.
Savings accounts may earn interest, often expressed as an Annual Percentage Yield (APY). Depending on the account terms, that interest may compound over time, which can help your balance grow.
Different types of savings accounts, including traditional savings accounts, high-yield savings accounts, and money market accounts, typically offer different features, interest rates, and withdrawal limits.
Banks and credit unions that are Member FDIC or insured by NCUA protect eligible depositors up to certain limits through the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA).
Opening a new savings account usually involves sharing personal details like your Social Security number and date of birth, meeting deposit requirements like a minimum deposit or opening deposit, and choosing savings goals that fit your financial situation.
A savings account is a type of bank account that helps you set money aside for the future instead of using it for everyday spending. A savings account is a type of deposit account where you place money with a financial institution and can withdraw it when needed, subject to any withdrawal limits the institution may set.
Savings accounts are typically interest-bearing accounts. This means the bank or credit union pays you an amount of interest on the money you keep there. This makes a savings account different from a checking account, which is typically designed for everyday payments, bills, and frequent withdrawals with tools like a debit card, and may not earn interest.
Many people use savings accounts to set aside money for short-term goals. For example, you might build an emergency fund, save for a car down payment, or keep money separate for travel, education, or a few months of living expenses. Others might also use a savings account to gradually set money aside for longer-term goals.
How savings accounts work
When you open a savings account with a bank, credit union, neobank or other financial institution, you become the account owner, also called the depositor. You deposit money into the account, and the financial institution may credit interest to your balance over time depending on the account terms. These are interest-bearing accounts, so the financial institution pays you for keeping money there.
Savings accounts work in a simple way:
You deposit money into the account, either in person, through an ATM or mobile banking or check deposit, by direct deposit from your paycheck, or by transfer from another account.
The bank tracks your account balance and calculates the amount of interest you earn.
The bank pays interest at a stated rate and shows the Annual Percentage Yield, or APY, which reflects the effect of compound interest over a year.
You can transfer funds or withdraw money when you need it, as long as you follow any withdrawal limits or rules in your account agreement.
Compound interest means the bank calculates interest not only on your original deposit, but also on the interest you already earned. Over time, this can increase the amount of interest you receive, especially if you keep adding to your savings and leave it there.
Common types of savings accounts
There are different types of savings accounts, and each one may fit a different financial situation or goal. These are some of the most common savings account options.
Traditional savings account
A traditional savings account is the basic type many banks and credit unions offer. Regular savings accounts like this usually sit next to your checking account at the same institution and may offer easy access through a mobile app, online banking, an ATM, or in-person visits to a branch.
A traditional savings account may have:
Interest rates that vary by financial institution and account terms
A minimum deposit or initial deposit to open the account
Minimum balance requirements, which means you may need to keep a certain amount of money in the account at all times
Possible monthly maintenance fees that the bank may charge if you don’t meet certain minimum balance requirements or other conditions such as the requirements of a monthly direct deposit
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High-yield savings account
A high-yield savings account is a savings account that offers higher interest rates, often called higher interest rates or competitive interest rates, than many traditional savings accounts. Many high-yield savings accounts are available through online banks that don’t operate large branch networks.
A high-yield savings account often:
Sometimes pays a higher APY than branch-based accounts
May have no monthly maintenance fees
May still have deposit requirements or a minimum balance
Often supports easy access through a mobile app and online tools
Money market accounts
Money market accounts, in the context of banks and credit unions, are interest-bearing deposit accounts that may combine features of checking and savings. A money market account may offer a debit card or limited check-writing, while still paying interest.
Typical features of money market accounts include:
Competitive interest rates, sometimes higher than a traditional savings account
A higher minimum balance than basic savings accounts
Limits on the number of withdrawals and transfers per period
Access through checks, a debit card, or ATM withdrawals, depending on the institution
Certificates of deposit
Certificates of deposit, often called CDs, are time deposit accounts where you agree to keep a specific amount of money on deposit for a set period. CDs are different from regular savings accounts because they usually don’t allow frequent withdrawals without a penalty.
Certificates of deposit often:
Offer fixed interest rates for a specific term length
Require a minimum deposit
Charge a penalty if you withdraw money before the term ends
Focus more on short-term or long-term fixed periods rather than easy access
Savings accounts vs. checking accounts and cash
Savings accounts and checking accounts both fall under the category of deposit accounts, but savings accounts and checking accounts serve different roles in your personal finance life.
A checking account usually:
Centers on everyday spending within your personal budget, such as bills, groceries, and subscriptions
Comes with a debit card and sometimes checks, which you use for frequent payments
May not pay interest, or may pay a very low amount of interest
A savings account usually:
Focuses on short-term savings and savings goals rather than daily spending
May not connect directly to a debit card for purchases
Pays interest at a set rate and APY
May have withdrawal limits or fees if you exceed a certain number of withdrawals
Keeping both a checking account and a savings account can help you separate money for everyday spending from money you want to save. Some people may also use investment accounts, such as a brokerage account or an IRA, for longer-term goals. These accounts work differently and typically involve investment risk, unlike a basic savings account.
Safety: FDIC, NCUA, and deposit insurance
Many savers look at safety first, especially when they want to protect an emergency fund or money set aside for short-term savings. In the United States, two main organizations insure eligible deposit accounts:
The Federal Deposit Insurance Corporation, or FDIC, covers deposits at many banks
The National Credit Union Administration, or NCUA, covers deposits at many credit unions
When a bank calls itself Member FDIC, or a credit union lists NCUA insurance, it indicates that eligible depositors have protection up to certain limits if the institution fails. FDIC insured banks and NCUA insured credit unions typically protect up to $250,000 per depositor, per institution, per ownership category, which includes savings accounts, checking accounts, money market accounts, and certificates of deposit, subject to the rules for each category.
Access, withdrawals, and limits
Savings accounts often offer easy access to your money but also encourage you not to use it for constant spending. Different institutions may manage this balance in different ways.
Ways to deposit and withdraw
You may be able to deposit money and withdraw money through:
Direct deposit from your employer
Transfers between your checking account and savings account
ATM deposits and ATM withdrawals
In-person deposits and withdrawals at a branch
Mobile app deposits using check images
Online transfers that let you transfer funds between accounts
Each financial institution designs its own rules, so some may allow more digital access, and others may focus more on in-person service.
Withdrawal limits and number of withdrawals
Many institutions set a maximum number of withdrawals or certain types of transfers you can make from a savings account during each statement period. These withdrawal limits may apply to online transfers, phone transfers, or point-of-sale transfers, though ATM and in-person transactions may follow different rules.
In the past, a Federal Reserve rule called Regulation D limited certain types of withdrawals from savings accounts to six per month, but the Federal Reserve removed this limit in 2020. Still, some banks and credit unions continue to set a number of withdrawals they allow and may charge fees if you go over their limit or may move your account into another product.
Costs and fees you may see
Savings accounts usually feel simple, but they can still include fees and deposit requirements. Understanding these details can help you feel more confident as you compare savings account options.
Common fees and requirements can include:
Monthly maintenance fees, which the bank may charge for keeping the account open, sometimes waived if you meet a minimum balance or set up direct deposit
Minimum balance requirements that ask you to maintain a certain account balance to avoid fees
Deposit requirements such as a minimum deposit or opening deposit when you start a new savings account
Fees when you exceed a set number of withdrawals or transfer funds too often from the account
Possible overdraft fees if your savings accounts link to a checking account for overdraft protection and the institution’s policy allows transfers that cover negative balances
Each financial institution must share key information about APY, fees, and terms for deposit accounts under the Truth in Savings Act and related rules. These rules help you understand the amount of interest you can earn and the potential costs and limits.
When people use savings accounts
Different people and families use savings accounts in different ways. You can choose the approach that fits your financial situation and comfort level.
Some common uses include:
Building an emergency fund that can cover several months of living expenses if you lose income or face an unexpected bill
Saving for a short-term goal like a vacation, a new phone, a car repair, or a small home project
Preparing for a down payment on a car or a home purchase
Setting money aside for expected but irregular costs like insurance premiums, holiday gifts, or school fees
Keeping money separate while you decide whether to place it in an investment account or leave it in cash
A savings account can support financial goals by giving you a place to save money with easy access while still earning some amount of interest. Many people feel more in control when they see their savings grow, even if they start with a small amount of money at a time.
How to open a savings account
Opening a new savings account usually follows a similar process, whether you choose a traditional bank, credit union, or online bank. Each institution may ask for specific details to verify your identity and set up the account.
You often need:
Your full name and contact information
Your Social Security number or another taxpayer identification number
Your date of birth
A government-issued ID, such as a driver’s license or passport
An initial deposit or opening deposit that meets the institution’s minimum deposit
You may open an account:
In person at a branch
Through an online application
Through a mobile app offered by a bank, credit union, or other financial institution
Many institutions let you fund your account by transferring money from another bank account, setting up direct deposit, or depositing cash or a check. Once the account opens, you can track your account balance, review the amount of interest you earn, and adjust your savings goals over time.
Choosing among different types of savings accounts
When you compare different types of savings accounts, you might see many options. Some people look at:
The APY and the amount of interest the account may pay
Whether the account has higher interest rates than other accounts available to them
Any minimum balance requirements or deposit requirements
Monthly maintenance fees and how to avoid them
Whether the account connects easily to a checking account for transfers
How easy it feels to deposit money and withdraw money
The strength of the mobile app, online tools, or in-person support
For example, someone who wants very easy access and in-person help might choose a traditional savings account at a local branch. Someone who wants higher interest rates and feels comfortable with online banks might consider a high-yield savings account instead.
Each person’s financial situation and comfort with technology may lead to a different choice. Even small steps, like opening a basic account and saving a modest amount of money at a time, can help savers move toward their financial goals.
Frequently Asked Questions
A savings account is a bank or credit union account that helps you save money, keep it separate from everyday spending, and earn interest on your balance.
Savings accounts earn interest when the financial institution applies an interest rate to your account balance, often using compound interest, and shows the return as an Annual Percentage Yield, or APY.
Savings accounts at banks that are Member FDIC and credit unions insured by NCUA usually protect eligible deposits up to certain limits through the Federal Deposit Insurance Corporation or the National Credit Union Administration.
A checking account usually focuses on frequent transactions and everyday spending with tools like a debit card, while a savings account focuses on setting money aside and earning interest, sometimes with withdrawal limits.
Withdrawal limits are rules that cap the number of withdrawals or transfers you can make from your savings account during a certain period, which some institutions enforce with fees or other actions if you go over the allowed number of withdrawals.
A high-yield savings account is a type of savings account that offers higher interest rates than many traditional savings accounts, often through online banks that may not have branches.
A money market account is an interest-bearing deposit account that usually pays a competitive interest rate and may offer limited check-writing or a debit card, and many people view it as one of the different types of savings accounts.
Some savings accounts have a minimum balance or minimum balance requirements and may charge monthly maintenance fees if your account balance falls below that level, while others do not require a minimum balance.
You usually need personal information such as your Social Security number, date of birth, and a government ID like a driver’s license, along with an initial deposit or opening deposit that meets the institution’s minimum deposit or deposit requirements.
Many people use savings accounts for short-term savings, an emergency fund, or specific savings goals like a down payment or a few months of living expenses, because they combine easy access with some amount of interest and clear tracking of progress in a mobile app or online.