What is a savings account? Definition, how it works

What is a savings account?

A savings account is a basic type of deposit account that enables you to put your money in a bank or credit union and earn interest on your funds. You can find savings accounts at traditional banks and credit unions as well as their online counterparts. 

You don’t need a large amount of money to open a savings account, and you’ll have easy access to your money.  

Why you need a savings account

These accounts are a smart place for your emergency fund or savings for shorter-term goals, such as a vacation or home repair. They keep your savings separate from your everyday spending cash and earn interest, which helps increase your overall balance without extra effort on your part. 

The best savings accounts pay high yields (right now, that’s around 4 percent), charge few or no fees and have low minimum opening deposit requirements. 

You’ll often find these features at online-only banks. They don’t have the costs associated with brick-and-mortar banks and pass those savings on to their customers. 

However, even accounts with monthly fees often provide ways to waive them. 

How does a savings account work?

You open a savings account at a bank or credit union, either online or in person, just like you would open a checking account. You’ll have to provide the institution with personal information to verify your identity and then deposit money into the account, meeting whatever minimum requirements are set out by the bank. 

Once you’ve made a deposit, the money in your savings account will begin to earn interest. You can withdraw money out of your account whenever you want, but some institutions limit the amount of withdrawals you can make from a savings account to six per month.

How does interest work in a savings account?

Banks typically advertise two numbers when it comes to rates: an interest rate and an annual percentage yield (APY). The APY is the percentage rate indicating how much interest a bank account earns over the course of one year. It differs from a simple interest rate in that it takes into account the effect of compounding, giving you a clearer picture of how much you’ll earn annually (assuming the APY stays the same). 

Your bank may choose to compound interest on a daily, monthly, quarterly or yearly basis. At the end of each compounding period, your accrued interest is deposited into your account. From there, your new account balance (deposits plus interest) begins earning interest.

You can use a compound interest calculator to see how deposits into a savings account quickly add up over time.

Keep in mind that savings account APYs are variable and can change at any time based, in part, on changes in interest rates set by the Federal Reserve. 

Are savings accounts insured?

These accounts are federally insured for up to $250,000 per account owner, per financial institution, per ownership category at banks insured by the Federal Deposit Insurance Corp. (FDIC), or at credit unions insured by the National Credit Union Administration (NCUA). And because they’re insured, they offer a safe place to put your money while earning interest.

How to maximize earnings from a savings account

The national average interest rate on savings accounts is low — only 0.62 percent as of February 20, 2025. Fortunately, there are a few ways to boost your earnings:

Consider online-only banks: Big brick-and-mortar banks typically offer low yields. Online-only banks tend to offer the best yields that are many, many times higher than the national average. 

Check out credit unions: A credit union may offer you a better yield than you can find elsewhere. These not-for-profit organizations are member-owned and tend to offer high rates and low fees.

Get a sign-up bonus: Some banks offer cash bonuses when you sign up for a new savings account. These bonuses can range in the hundreds of dollars. It’s worth keeping an eye on the best bank account bonuses and signing up for an account with a great bonus and a great rate.

Avoid fees: Some savings accounts advertise an attractive rate, but they come with fees that can eat into your interest rate. Do what you can to avoid incurring fees on your savings account. Better yet, shop for an account with few (or no) fees.

Savings accounts advantages and disadvantages

Some of the advantages of savings accounts are:

• Safety: Money kept in a savings account at an FDIC-insured bank or an NCUA-insured credit union is insured (within limits).
• Growth: Savings accounts are generally interest-bearing, meaning you will earn interest on the money you save in the account.
• Liquidity: Though savings accounts provide a place to stash money that is separate from your daily banking needs, they still let you make withdrawals. Limitations on withdrawals vary from bank to bank, though some banks don’t limit withdrawals at all. 
• Organization: Having savings in an account separate from your spending money makes it easier to track savings progress, curb overspending and get a better view of your overall finances.

Some of the disadvantages of savings accounts include:

• APYs are variable: Your account may earn a competitive interest rate now, but there’s no guarantee it will stay that way. You’ll want to keep an eye on your interest rate. 
• Accessibility restrictions: Some institutions restrict the number of withdrawals or transfers you can make from a savings account to six per statement cycle.
• Loss of purchasing power over time: If your savings account yield is lower than the inflation rate, your money will lose purchasing power over time.

How much should you keep in your savings accounts?

The amount of money to keep in an account varies depending on your savings goals. If, for example, you’re using it as an emergency fund, most financial advisors suggest that you keep three to six months’ worth of living expenses in your account.

For example, if you spend an average of $3,000 per month on costs such as your mortgage, car payment and food, you would save anywhere from $9,000 to $18,000 in the account.

If you’re saving for a specific goal — such as a vacation, buying a house or purchasing a car — you would keep enough in the account to pay for that expense.

Consider using a savings calculator to determine how long it would take to reach a specific savings goal, based on how much you contribute to a savings account monthly.

Different kinds of savings accounts

Savings accounts aren’t your only option when it comes to federally-insured places to keep your money. There are other savings products offered by both banks and credit unions that are low-risk and interest-bearing.

• Money market accounts: Money market accounts are a type of savings account that also come with the benefits of a checking account. These accounts may come with an ATM card and checks, allowing you to spend your savings easier. These accounts have higher rates than traditional savings accounts, but they may also have higher minimum balance requirements.
• Certificates of deposit (CDs): CDs are a time-restricted savings account. They hold your money for a specific period of time. In exchange, they pay a guaranteed fixed yield that’s generally higher than savings or money market accounts. The trade-off for the higher yield is that you can’t take your money before the CDs maturity date without paying an early withdrawal penalty (though there are no-penalty CDs). CDs come in terms as short as a few months to as long as five years (in rare cases, even longer).
• Retirement accounts: Some accounts are geared strictly towards retirement, including 401(k) retirement plans and individual retirement accounts (IRAs). A 401(k) is a retirement plan sponsored by your employer. In contrast, IRAs are personal retirement accounts independent of your employer.

FAQs

• How do you open a savings account?

  1. Decide on which account: Determine if the account will be solely in your name or if you’re opening it with someone else.
  2. Prepare documents: Have your Social Security number or tax ID number handy, along with information from an official, government-issued ID such as a driver’s license or passport. If it’s a joint account, you’ll need this information for both people. You’ll also likely need to provide your address, phone number, and date of birth.
  3. Submit your application and deposit: Make sure you’ve read all necessary documentation about account fees, responsibilities and how your account’s interest is calculated. Then submit your application and make your first deposit.

   

• Can you lose money in a savings account?

  Technically, yes. If you deposit your money in a financial institution that isn’t federally insured by the FDIC or NCUA, you could lose your money in the unlikely event that the bank or credit union fails.

  But, if your institution is insured by one of those entities (as most are), your deposits are protected up to $250,000 per account owner, per financial institution and per account ownership type.

  One other way you could “lose” money in a savings account is through inflation. While you’re technically not losing any of your actual deposited dollars, inflation can make your money worth less if the interest you’re earning doesn’t beat the inflation rate.

• Are online-only savings accounts safe?

  Yes, online-only accounts are generally considered safe. Deposits at online banks and credit unions that are FDIC and NCUA-insured are protected up to $250,000 per account owner, per account ownership type and per financial institution.

  Accounts at online-only banks are also safe from an account security standpoint. Many online banks have implemented two-factor authentication, significantly increasing the difficulty for potential identity thieves to access your accounts.

  However, while these protections are robust, it’s important to always follow standard internet safety guidelines, such as creating complex passwords, avoiding phishing scams and ensuring that you’re dealing with a legitimate institution. This goes for online-only accounts as well as accounts held at brick-and-mortar banks.

• How much will $10,000 make in a savings account?

  Let’s say that you made an initial deposit of $10,000, and your bank account compounds interest annually. If your money is at a big bank, you might be earning a paltry 0.01 percent APY on your savings. At the end of a year, you’d earn about $1 in interest.

  However, in a high-yield savings account with an APY of 3.5 percent, you’d make about $350 in a year. That is a good amount of extra money for no extra effort on your part.

• What’s the difference between a checking account and a savings account?

  A checking account is used for spending, comes with checks or a debit card and doesn’t have transaction limits. Typically, checking accounts don’t pay interest.

  In contrast, a savings account is best for storing money and ideally earns a competitive interest rate. Plus, withdrawals out of a savings account may be limited.

• Can you have more than one savings account?

  Yes, you can have multiple savings accounts, though you may not want to. The higher your balance is in one savings account, the greater effect you’ll get from compounding and the faster your balance will grow.

  But having multiple savings accounts can have some benefits. For example, it can allow you to split up your funds so you protect money for one savings goal from being spent on another. You can also open other types of savings accounts, such as CDs. Unlike regular savings accounts that have variable APYs, CDs allow you to lock in a savings rate for a specified period of time. Depending on the interest rate environment, that could be a big win for your savings balance.