A savings account is different from a checking account. While a checking account is for everyday expenses. It is a safe place to store cash and can yield an interest rate. Indeed the accounts are for savings exclusive.
What is a savings account?
A savings account also known as a deposit account, is an account where you can store extra income surely while earning some interests.
These accounts are federally insured for up to $250k of the money in your account in case your bank failed.
Why do I need this type of bank account?
Using this account gives you some distance between your money and your daily expenses, future planned expenses like vacation and future unplanned expenses such as an emergency fund.
Federal law also mandates that a person cannot withdraw or transfer money from a savings account more than six times per month. Any withdrawals will result in a fee from your bank or will be declined. In addition, if you continue exceeding the limit it can lead to some further consequences.
How does savings account interest work?
The money you store into your saving account is used by the bank to fund loans for other bank customers. In exchange for helping the bank, it gives you a percentage of the money it borrowed. Typically, the interest starts from 0.01% depending on the bank. Before opening, this type of account is recommendable to seek additional information or shop around to find the best interest rate.
Type of savings accounts
Normally, you have a regular account then you can open another type of account to maximize your gain with more interest.
High yield accounts offer in average 2% higher interest rate than the ordinary account.
Certificates of deposits: require a large minimum deposit, but have higher yields than the normal account. But the money has to be locked for a minimum period of 36 months.
Money market account (MMA): Often comes with a higher minimum balance and a minimum deposit. But it offers a better interest rate. The account comes with a check and a debit card. Nonetheless, transactions are still limited per month.
Online account in an online bank: Normally because they don’t have all the overhead related to brick and mortar business. The interest rate provided to customers owner of saving accounts is higher than traditional banks.
- It helps to have an emergency fund store somewhere should you have an urgent need.
- The higher is the money in your savings account the better would be your interest rate. Also, accounts with strong APYs can help your money grow.
- It helps you plan for the future
- Money is stored for a while
- Typically this type of accounts has a withdraw limit of a maximum of 6 times per month. If you go above the limit you will be subject to a fee or a declined transaction.
- Usually, the interest is not very high
How much should I keep in my savings account?
The answer to this question depends on the bank that serves you. Conventionally, different banks have different deposit and balance requirement. Some might require a minimum deposit of $500 others $0. Commonly as a rule of thumb you should always keep at least 06 months of your current expenses in your savings account. Finally, always make sure 10% of your income goes directly in your saving account.
How to open a savings account?
1. Shop around and for the best savings account: Don’t hesitate to visit multiple banks, online banks, and microfinance institutions. Not all savings account are created equal.
- Compare different APYs( Annual Percent Yields) and select the highest.
- Compare how the bank compounds interest ( daily vs monthly). You will earn more if the interest is compounded daily.
- Compare monthly maintenance fees and select the lowest
- Compare minimum require deposit and balance
2. Gather documents to open the account
- Driver license, government-issued ID or passport
- Social security number
- Most recent residential addresses
- Email address
- Date of birth
- Minimum deposit if available and required
3. Know your savings account withdrawal limits
All savings account are subject to a limit of six per monthly statement cycle for certain types of transactions, withdrawals, and transfers. These include the following:
- Transfers to other accounts including those with the same institution
- Automatic transfers such as those set to pay bills or fund accounts
- Check transfers
- ACH withdrawals
- Overdraft transfers into checking account
- Phone processed transfer
Savings accounts are great to have no matter your financial situation. You never know what could happen in the future. Moreover if well managed with a consistent amount in the account, it could be a good source of passive income.
- Overdrafts: A deficit in a bank account caused by drawing more money than the account holds.
- ATMs: Automatic Teller Machines
- FDIC: Federal Deposit Insurance Corporation
- ChexSystems: check verification service and consumer credit reporting agency owned by the eFunds subsidiary of Fidelity National Information Services
- ATM card: It is a pin-based card. You can use it at the local ATMs and you might be able to use it to make purchases.
- PIN: Personal Identification Number
- Debit card: It is an ATM card with a visa logo or a Mastercard logo on it.
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