Most of you might be familiar with the functions of a savings account, but for those who are new and are preparing to open their first bank account, we’d want to spell it out a little. Savings account can be defined as a type of account held by an individual at any financial institution that fetches you interest on your deposit.

Though the interest you get on your savings account is at a modest rate of interest, it is still hugely popular amongst the people. The reliability and the safety of the savings account are the prime reason for their popularity.

However, there are a bunch of limitations on the frequency of withdrawal of the funds. But on the whole, they offer good flexibility and a great way of building funds for any emergency. In your savings account, you can save up money for a current goal, such as going on a vacation or buying a car, or just putting away some money so that it can fetch you some interest. 

Irrespective of the age, almost everyone has at least one saving account. This is ideally the best way to build an emergency fund for yourself and your family. If you do not have one savings account yet, here’s everything you should know to get started. 

How does a savings account work?

You can either start your savings account with a credit union or a bank. Moreover, these accounts can be opened both in-person and online. Whichever option you pick, you’ll have to provide the financial institution with all the necessary information about you to get you started. Once the account is open, you can deposit the money into it. 

So, what is the amount of money that you can put in your savings account? In most cases, this amount is variable and is thus, different from one financial institution to another. However, at all times, your money stays safe. The acceptable money that you keep in your savings account is insured, and you can have a cover-up to the maximum of $250,000.

Furthermore, the rate of interest that you get for your savings is also variable and might change over time. But the good thing about this type of account is that whenever you need, you can make money from it to cater to your needs or desires. However, there’s a law that limits the number of times you can withdraw from your savings account. 

How much money should you save in the savings account?

To tell the truth, the sum of money you save in your savings account depends on your objective or goal. If your savings account is your emergency fund, then, in this case, you should have living expenses worth at least 3 to 6 months in the account. For instance, if you spend approximately $4000 every month on all your expenses, including your mortgage, groceries, utility bills, car insurance, etc., you can save anywhere between $12000 and $24,000 in your savings account.  

On the other hand, if you are saving for a particular objective or a goal, such as purchasing a house, going on a vacation, or buying a car, you’ll have to increase the amount in your savings account to cater to this goal. 

If required, you can take help from an online savings account calculator to see how much time you would need to save up for a particular goal. 

Is it safe to invest in an online savings account?

In all honesty, the online savings account is equally (if not more) safe as your traditional savings account. However, before you pick any institution to start an account, there’s one thing you need to check: the institution you opt for is insured. If the institute is insured, all your deposits would be safe. You can search for any bank, either online or traditional and check if they are protected by the Federal Deposit Insurance Corporation (FDIC). On the other hand, if you are opting for the credit unions, then you need to ascertain that they have the insurance from the NCUSIF or National Credit Union Share Insurance Fund. Both of these financial institutions insure you up to an amount of $250,000 per insured credit union or bank, per depositor, as well as, per ownership.    

Pros and cons of a savings account

Just like every other financial product, even your savings account comes with a share of advantages and disadvantages. Moreover, to make a fair decision, you should know both sides of the coin. So, here, let’s take a look at both advantages and disadvantages of them one by one. 


  • Growth 
    As discussed, almost all savings accounts are interest-bearing accounts. This means that the deposits you have in your savings account will fetch you some interest. So, you not only save your money but also grow your money over time.
  • Safety

All the money in your savings account is insured. So, if your money is in the bank, it will be insured by the FDIC, on the other hand, if you have your money in the credit unions, it will be insured by the NCUSIF. You can get an insurance cover of approximately $250,000 on this amount. So, in every way, your money stays safe. 

  • Liquidity

Yes, the savings account gives you a safe place where you can store all your surplus cash net of your everyday banking needs, but they do allow you to make approximately six transfers or withdrawals in a month in every cycle.


  • Restrictions on accessibility

On your savings account, certain federal restrictions restrict your total transfers or withdrawals in every cycle. In one statement cycle, you can only make 6 of them. 

  • You can get better yields 

The primary downside of the savings account is that the interest that you get on your savings account is usually lower than the other financial products allowing savings. For instance, money market accounts, as well as CDs (Certificates of deposit), offer a much higher interest rate.

Tips to maximize your earnings from a savings account

On most savings accounts, you only get a minimal interest rate. However, there are different ways that you can use to increase your earnings from your savings account.

Here are some of them: 

  • Seek a sign-up bonus

There are a couple of banks that get you a good sign-up bonus whenever you start a new savings account. This bonus could be anything in the range of a few 100s of dollars. However, to get this offer, you need to research and find out about some of the best account bonuses that are offered by the banks. Nevertheless, do not compromise on the interest rate either, because that’s something that will stay with you till you have your bank account. So, only once you find a bank that offers a good bonus and a great interest rate, you should consider getting associated with it.  

  • Try out some online or community banks

Usually, the traditional banks with physical branches do not give you the best returns. On the other hand, online banks are known to fetch you excellent yields. It is also because they do not have to bear the cost of maintaining their traditional banks. Consequently, their savings are more, which are naturally passed on to the customers. 

  • Try some credit unions
    In comparison to the banks, the credit unions are known to give you better interest rates. These are NPOs and are owned by the members, and come with low fees and a high rate of interest.
  • Be aware of the fees

There are a few savings accounts that though offer you an amazing interest rate, but they also charge you a hefty fee. It is best to avoid paying a fee on your savings account. So, calculate the opportunity cost and then make your decisions. It is good to shop around before settling with any particular financial unit. 

  • Understanding the impact of compound interest (CI) on the balance
    In the savings account, the money grows every day. However, for it to grow, you need to ensure that you save more than you withdraw. Of course, your money in this account is liquid, but that does not mean that you have to exhaust it completely. The primary objective is to save. So, if you save more, you earn more. Because of the power of compound interest, your interest keeps adding up, making your savings bigger every year. To understand this, you can use a CI calculator to help you understand how even a small amount of money can grow up so quickly.
  • Starting a savings account in the bank
    Firstly, you need to start by being aware of your goals. Ask yourself why you need to start a savings bank account. For instance, is your goal, saving for a big purchase, a vacation, or just wanting a contingency fund for your future? When you are well aware of the agenda, you’ll be able to make better decisions about the type of savings account that is ideal for you. Further, you have to do some research work. You cannot just go out and open an account in the bank whose branch is the nearest to your home. Understand that saving accounts come with a bunch of offers and deals. To know them, you should shop around and research. Also, you shouldn’t restrict your search only to the traditional bank. You should also involve community banks, online banks, and credit unions in your research. You might not know that these happen to offer a much more competitive rate of interest as compared to the larger retail banks. However, your research shouldn’t be limited to the rate of interest. After you have shortlisted a few banks based on the interests they offer, you need to check other factors, such as the fees per transaction, the minimum balance needed, and the maintenance fee charged by the bank. Next, ensure that the savings account from these institutions comes with all the necessary features that you possibly need, such as the mobile application, Internet banking, among others. Following it, you need to check that the institution you have shortlisted is secured by the NCUSIF or the FDIC. 

Once your savings account is chosen, you will have to undergo a setting up procedure. Now, this would be different for different banks or credit unions. Some of the financial institutions will have everything done online, while for some, you’ll have to visit the branch. Whichever model you go with, you’ll have to submit a bunch of documents to the bank. It would include the Social Security number, driver’s license, documents that prove your address, name, contact, date of birth, and state ID. Once all of this is done, the financial institution will help you with the tips for funding your savings account.  

How are the funds added to the savings account?

There are four ways in which the funds are added to the savings account. These include:

  • Cash deposit
    It is the traditional method to add funds into your savings account and can be done either by visiting the bank or the credit union or making the deposits at a few specified ATMs. 
  • Check deposits
    You can deposit checks directly into your account using a deposit slip. This might take a day or even longer sometimes for the money to reflect in your account. 
  • Internal transfer from checking account
    Those who have a checking account can move money from checking to savings by way of direct transfer. 
  • Electronic transfer
    Funds can also be transferred electronically from some other bank to your savings account.
  • Direct deposit
    A direct deposit is when somebody else deposits into your bank account.