What is a savings account? And other common questions, answered


A savings account might be the perfect option if you’re looking for a good place to stash your cash. For starters, your money is safe: Accounts held at FDIC-member banks and NCUA-member credit unions are insured up to $250,000 (per depositor, per account type). A savings account also makes it harder to access your cash (no ATM cards, debit cards, or checks to tempt you), helping you avoid impulse spending. However, perhaps the biggest perk (especially right now) is that savings accounts pay interest, so you can put your money to work and save even more — whether you’re building an emergency fund or saving for a dream vacation.

Considering options for your cash? Here are easy-to-understand answers to your most searched questions about savings accounts.

A savings account is an interest-earning deposit account that you can open at a financial institution like a bank or credit union. Unlike investment accounts, savings accounts are insured up to $250,000 (see above), so you won’t lose your cash if the bank or credit union fails.  

TIP: Non-deposit investment products like stocks, bonds, mutual funds, and crypto assets are not insured, even if you buy them through an FDIC-member bank or NCUA-member credit union.

You can open a savings account at a brick-and-mortar or online bank or credit union. The process is straightforward, but you need to provide a government-issued ID (a driver’s license or passport) and your Social Security number, date of birth, address, and contact information. You might also need to make an initial deposit, so having your checking account details handy is helpful. It’s a good idea to compare at least three banks and credit unions to find the best rates and fees.

After you open and fund a savings account, the bank uses the money to make loans to other customers. Of course, the bank makes money on those loans by charging interest, so it pays you a variable interest rate in return. (Since the recent Federal Reserve (the “Fed”) rate hikes started in 2022, interest rates on savings accounts are the highest they’ve been in years.)

You can access your money whenever you like, but some banks permit only six monthly withdrawals (excluding those made at ATMs or in-person at the bank) before an excess penalty kicks in. There are no limits on the number of deposits you can make.

There’s more than one way to save. Here are six types of savings accounts to consider:

TIP: Savings accounts — including CDs and money market deposit accounts — held in an IRA are protected by FDIC and NCUA insurance up to the $250,000 limit. The Securities Investor Protection Corporation (SIPC) protects up to $500,000 of investments (such as stocks, bonds, and mutual funds) held in an IRA, but the protection only kicks in if your brokerage company gets into financial trouble. The SIPC doesn’t bail you out if your investments lose value.  

Compound interest is the interest you earn on interest. It helps you grow your money faster, and it’s so powerful that Albert Einstein once declared, “Compound interest is the eighth wonder of the world.”

Savings account interest compounds daily, monthly, quarterly or yearly. Your bank deposits the interest into your account after each compounding period, and then you earn interest on the new account balance (your deposits plus the interest). The higher your interest rate and the more frequently it’s compounded, the more interest you earn over time.

Online banks and credit unions offer high-yield savings accounts with higher interest rates, lower fees, and lower minimum deposit requirements than traditional savings accounts. On the flip side, online banks have few (if any) branch locations, so it can be difficult (or impossible) to deposit cash or get in-person help.

Rather than keeping all your cash in one place, it’s helpful to have several savings accounts — one for each significant savings goal. That way, it’s easier to keep track of your progress because you’ll know exactly how much you’ve saved toward each goal. It can also reduce the temptation to raid money earmarked for one purpose to pay for something else. And if you have a lot of cash, having multiple accounts can ensure all the money is federally insured. At a minimum, it’s a good idea to have two savings accounts — one for short-term savings goals and one for long-term targets.

A certificate of deposit (CD) is a time deposit where you earn a fixed interest rate for a set amount of time (aka the “term”). CDs often pay better interest rates than other types of savings accounts, and your cash is insured up to $250,000 if your CD is at an FDIC-member bank or NCUA-member credit union. CDs are available at traditional (brick-and-mortar) and online banks and credit unions, though you’ll typically find the best rates online. 

CDs work like savings accounts in that you deposit cash and earn interest. However, once you put money into a CD, you must leave it alone: You can’t deposit or withdraw any money before it matures. Because the bank expects to hold onto your cash for the entire term, early withdrawal penalties apply — and they can be steep, depending on the bank.

CDs offer some of the highest returns you can find at a bank account — and they’re safe and predictable. However, you must be willing (and able) to lock up your cash for a while to take advantage of those perks. CDs may be best suited for people who want to save for a near-future purchase (such as a car down payment), limit access to their savings, or earn a guaranteed return without market risk.

A savings account can be an excellent place to stash cash you don’t plan to spend right away while earning interest. Shop around to find an account with high rates and low fees to save even more and reach your financial goals sooner.

Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.

This article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as Financial and Home Services Editor for the Hearst E-Commerce team. Email her at [email protected]



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