Savings accounts aren’t overly complicated. You open a savings account at a bank or credit union and deposit money into the account. The bank then pays you interest on your balance.
You can continue adding money to savings, usually through one or more of these methods, depending on the bank:
- Cash or check deposits at the ATM
- Cash or check deposits at a branch
- ACH transfers from a linked bank account
- Wire transfers from another bank account
- Mobile check deposit
- Direct deposit
The interest rate you earn, and the corresponding APY (annual percentage yield), can vary from bank to bank and from account to account. The APY is the rate of interest earned on your savings when compounding interest is factored in.
So, assume you open a savings account with $1,000. You deposit $200 a month into your account and the bank pays an APY of 0.90%. After one year, your balance would be $3,419.84, $3,400 of which are your deposits and $19.84 of which is interest. The higher your APY, the more you deposit and the longer you save, the more your money can grow over time.
Benefits of Opening a Savings Account
As Forbes states there are several good reasons to keep money in a savings account, starting with being able to earn interest. As the previous calculation shows, savings accounts allow you to increase your money without your having to do anything extra. Although this isn’t free money—you still have to pay taxes on interest earnings—it is money you can earn passively just by saving regularly.
Savings accounts also offer more liquidity and convenience than other ways to save. A certificate of deposit or CD, for example, is another option for saving for short- and long-term goals. And, compared to some savings accounts, it’s possible to earn a better APY with a CD account.
But there’s a catch: CD accounts are time deposits, meaning that when you open one, you’re agreeing to leave your money in the CD for a set time period. While your money is in the CD, it earns interest, but you generally can’t access it without triggering a penalty before it matures. A savings account, on the other hand, would allow you up to six withdrawals per month without a penalty.
Savings accounts also are a safe way to set aside money for the future. While investing money is another way to help it grow, putting money into stocks or mutual funds can carry risk. Savings accounts, on the other hand, can offer a consistent rate of return without putting you at risk of losing money.
And, unlike investments, savings accounts can be FDIC or NCUA insured. This FDIC (or NCUA) insurance means that, even if your bank fails, your savings are protected up to certain limits ($250,000 per depositor, per account ownership category).