Experts agree that the key to financial stability is a healthy understanding of exactly how your money works for you. And while earning that money might feel like the hardest part, deciding where your funds should live in the long and short term is a hugely important step in the process.

One of the most common places to stash away cash is a savings account. You may very well already have one, and because they're so common, you might think you know all there is to know about them. But when it comes to your finances, there's no detail too small to unravel, so let's start from the beginning and work from there. 

What is a savings account?

At its heart, a savings account is a safe place to store your hard-earned money that isn't under a mattress or inside a cookie jar. (And with tons more opportunity for growth.)

Savings accounts are offered by consumer banks, credit unions, and some other financial institutions, and are probably the second type of account you might encounter when newly signing up — the first being a checking account.

Bank checking and savings accounts are insured by the Federal Deposit Insurance Corporation (FDIC) and credit union accounts by the National Credit Union Administration (NCUA) for balances up to $250,000, which means that your balance is secure even if your bank goes out of business.

This level of reliability differentiates checking and savings accounts from, say, investment accounts, where funds fluctuate with the whims of the stock market and are never guaranteed.

How does a savings account differ from a checking account?

While checking accounts are typically connected to your debit or credit card and intended for frequent transactions, savings accounts are all about the slow burn. They have much higher interest rates than their checking account counterparts: As of this writing, the annual percentage yield (APY) on the average checking account is .04%, while online high-yield savings accounts offer rates up to 1%. (The difference between your $10,000 nest egg earning $4 a year or $100.)

The trade-off for all that potential interest-fueled growth is the fact that your funds aren't quite as easily accessible as they would be in a checking account. Typically, federal law requires banks to limit the number of fee-free withdrawals from savings accounts to six per month, after which the account holder gets dinged. 

Who needs a savings account?

This one's easy — anyone and everyone! There's absolutely no one who can't benefit from a good savings account. (Or two or three or 20, to help you hit any number of specific savings goals.)

Just note that many  savings accounts have monthly fees, balance minimums, or require a deposit of a certain type to get started. So while there's no one-size-fits-all formula for choosing the best savings account, these are some of the things to look out for when finding the perfect one for you.

What are the different types of savings accounts?

Interest rates differ from institution to institution, of course. But slight variations aside, there are some basic terms to know when you're considering different types of savings accounts:

  • Basic savings accounts: Available through in-person sign-ups at your physical bank, often with interest rates just slightly higher than your checking account. (The current average is .05%.)
  • Online savings accounts: Virtually identical to the above, except with easier access, online sign-ups, and interest rates that are often far more competitive. 
  • High-yield savings accounts: These accounts are designed specifically for longer-term saving and growth. They typically offer the highest interest rates available at any given moment, often rivaling that of certificates of deposit (CDs), another savings vehicle.
  • Money market accounts: These checking-savings hybrids are similar to high-yield savings accounts, pairing high interest rates with checking account functions like a connected debit card or the ability to write checks. But these accounts often have balance minimums or milestones to pass in order to reach the higher interest tiers, so make sure you do your research. 

Some of these account types overlap — many online savings accounts are also high-yield savings accounts, for example — but knowing this terminology should serve you well as you hunt for your perfect savings account.

When should I use a savings account?

Your savings account is the perfect place to stash funds that you might need to draw on anywhere between now and the distant future. The combination of growth and accessibility makes these accounts ideal for emergency funds, vacation savings, or big-ticket items like a home down payment or a wedding fund. 

Particularly distant goals with a set maturity date, however, might be better served by different accounts. For example, a high-earning CD can be a great place for college savings, so you can lock in a high interest rate over time, and retirement savings will always have the greatest potential for growth in a designated retirement account.

How much money should I keep in my savings account?

Experts suggest aiming to have three to six months of expenses in a savings account, in case of emergency, and to set up automated transfers so the account will grow without you having to think about it.

But from there, the sky's the limit — right up to that $250,000 cap mentioned earlier. That total is the maximum amount that the FDIC is able to insure per depositor, banking institution, and ownership category. So while you can carry a higher balance, you probably shouldn't. The safer bet is to distribute those funds over multiple accounts so that the full amount is always insured.

How can I sign up for a savings account?

Since there's no limit to the number of accounts you can open or the savings goals you can strive for, signing up for a savings account is a relatively low-risk proposition. 

Just decide which savings goal you're aiming to hit — which will inform the type of savings account is best for you — and where you'd like your account to live. Almost every banking institution now allows you to sign up for its savings accounts online, so once you've chosen your favorite, signing up is easy.

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Michael Thorne
Financial Planner
Thorne Financial Planning