Savings accounts are a way to put money aside for longer-term use than checking accounts. In return for "lending" your money to the bank, savings accounts usually pay you a nominal amount of interest, which is an easy way to earn a few extra dollars over time.
Most savings accounts have a minimum balance requirement, which is typically higher than the minimum balance required for a checking account.
It is also somewhat harder to spend the money that's in your savings account. You cannot write checks out of a savings account, or connect the account directly to your debit card for making purchases. You can only access funds by withdrawing them at a branch or ATM, or by transferring money into your checking account. In addition, the federal government limits the number of withdrawals you can make from a savings account to no more than six per month, and banks are required to impose a penalty for any withdrawals beyond that.
Learning to save
You might only think of "savings" as putting aside money for a house or retirement – maybe things far in the future for you – but having some money set aside is important for big purchases or unexpected expenses. What if your car breaks down? Car repairs or a new vehicle will be expensive. What if you break your leg? That hospital visit will cost money, and maybe you won't be able to work for a few weeks. You want to have money on hand for emergencies. Savings can also be helpful for things like a vacation, a nice dinner out, or holiday gifts.
It's important to get into the habit of saving as early as possible, especially if you have a job. That doesn't mean you should just pay your bills and put the rest of your paycheck in savings, but you should aim for a goal that is reasonable for you. If putting 10% of your paycheck in savings doesn't allow you to meet your other expenses, maybe try 5%, or start out with a flat amount like just $10 per paycheck. Or try this: Have your paycheck direct-deposited into your checking account, and set up an automatic transfer from your checking account into your savings account – pay yourself first! That way, it's almost like that money was never even in your checking account, so you won't be tempted to spend first and save later.
You should not use your savings account as a backup checking account for everyday spending; once the money is in your savings account, you should "forget" about it unless you have an actual need for it. Even putting aside $10 a week or half of your birthday/graduation money will add up over time. And money in your savings account will earn interest based on the balance – the higher the balance, the more interest you'll earn. Free money!
Choosing a savings account
A savings account might be a good option for you if you want to get into the habit of saving, even if you don’t have a lot to put aside right now. Some banks also offer savings account specials for students, with lower minimum balance requirements.
It will likely be useful to have your checking and savings accounts at the same bank or credit union, for ease of transferring funds into (or out of) your savings account.
- What is the minimum amount to open the account?
- Is there a minimum balance requirement? What are the fees if I fall below it?
- Are there other account fees?
- Can I set up automatic transfers from my checking account to my savings account?
- Can my savings account provide overdraft protection for my checking account? What are the fees for this?