What Do I Need To Know About Savings Accounts?

A savings account should be the cornerstone of any household savings program. It will often be the first place you start to accumulate savings, and should remain a financial tool throughout your life.
The following are some key characteristics of a savings account:

  • Guarantee of principal: The principal value of a savings account will not fluctuate. This means there is no growth component to a savings account, but you should be able to count on getting what you put in
  • FDIC insurance: If your bank is a qualifying institution, the guarantee of principal in a savings account is backed by insurance from the Federal Deposit Insurance Corporation (FDIC). Before opening a savings account, you should check to see if the bank is covered by the FDIC, and that your deposit falls safely within FDIC coverage limits
  • Interest: Savings accounts pay interest based on a percentage of your average deposit balance. Generally, savings account interest rates are modest, and are subject to continual fluctuation dependent on market conditions. Note that accrued interest is not covered by FDIC insurance
  • No specified term: Savings accounts allow you access to your money when you need it, and do not require that your deposit be held at the bank for a fixed amount of time. However, you may be expected to provide advance notice of any withdrawals from the account
  • Limited transactions: Savings accounts are limited to six transfers out of the account within any month (or similar statement cycle). This includes withdrawals, transfers to your other accounts, or payments to third parties. Only three of those six transfers can be made to a third-party in any given month. Along with the above minimum requirements, banks are permitted to place additional transfer restrictions on savings accounts
  • Other features: Savings accounts may have other features, which vary from bank to bank. Some offer online banking or preferred interest rates to large depositors, while others might offer a free checking account for meeting a minimum account balance

A savings account may not be the right vehicle for meeting your regular monthly expenses, but it is a good place to put money when you begin saving. Doing so will earn you some interest, and allow you to access your money should an unusual expense arise. As your savings grow, you might want to divert some of that money to longer-term accounts or investments. However, a savings account will remain a good place for an emergency fund, or for money earmarked for major expenditures within the next few months .

This Guide to Money answer includes the topics: Save, Savings accounts.

Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.

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