In this video by The Ascent, we're going to explain what a savings account is, how they work, and how to decide if one of these accounts is right for you.
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A savings account is an interest-bearing account commonly offered by banks and credit unions.
You put money in and your bank uses your funds to provide loans to other customers.
Then, your bank pays you some of the interest it's earning every month as a thank you.
Because banks count on a steady supply of deposits to do business, they can't have customers taking money out too often.
That’s why they normally don’t issue debit cards or checkbooks with savings accounts.
Alright, so how much money can you actually make with a savings account? That depends on how much you keep in your account and what its annual percentage yield is.
Annual percentage yield, or APY, tells you the return you can expect on your money after it's been in your account for one year.
Say you put $10,000 in a savings account and it earns a 1% APY. That means that after one year, your balance would increase by 1%, or $100.
But what's really cool about savings accounts is your interest compounds year after year so you'll start earning interest on top of your interest.
Now you have a balance of $10,100 and you'll earn another 1% APY in the second year.
But this time, that 1% nets you $101 because you're earning interest on your initial $10,000 deposit and the $100 you earned last year.
In year three, you'd earn 1% on your new balance of $10,201, and it just keeps building from there.
Your savings account's APY depends on which bank you choose.
Online banks can usually offer much higher APYs than brick-and-mortar banks because they don't have the expense of running a huge branch network.
This is the way to go if you're trying to earn the most on your savings.
Now, it might seem like a good idea to put as much money as you can in your savings account, but there are a few rules you should keep in mind.
First, your savings account isn't a great place for money you plan to use to pay your bills, rent, groceries, or any other recurring expenses. Keep that money in a checking account where you can access it easily without worrying about penalties.
A savings account also isn't a good place to store money you don't plan to spend for decades. The interest you earn in a savings account is nice, but you can do a lot better over the long term by investing your money in, for example, stocks and shares.
And whatever you do, never keep more than $250,000 in a savings account. Most bank accounts are insured by the Federal Deposit Insurance Corporation, or FDIC.
If your bank goes under, the FDIC will reimburse you up to $250,000 for the money in your account, but no more.
If you have more than $250,000 in savings, spread it around between different banks or invest some of it to help it grow faster.
Use your savings account to house your emergency fund and any money you're saving for a financial goal you hope to fulfill in the next three to five years. I
f you're planning a vacation or saving up to put a down payment on a home or car, that's money you should keep in your savings account.
So now you know what a savings account is for, you're probably wondering how to choose the right one for you. There are a few key things you should look for.
First, always make sure the savings account you're considering is FDIC-insured.
You'll probably never have to worry about your bank closing for good, but you still don't want to put all your hard-earned cash at risk.
Next, look for an account that offers a competitive APY. What's considered competitive changes over time.
Get the lay of the land by researching savings account APYs from several top banks, or head over to The Ascent's website to compare some of our top picks.
