What is a Savings Account?

A savings account is a type of bank account that allows the account holder to continually earn interest on the account balance. Unlike other types of bank accounts that earn interest, savings accounts usually do not require the account holder to leave the funds untouched for a specified period of time. Funds can be withdrawn from a savings account at any time within a bank branch, or by using a check card at an ATM. The main difference between savings accounts and other types of interest earning accounts is the easy accessibility of funds and the leniency of account terms in regards to early withdrawals. Savings accounts are offered by various financial institutions including banks, credit unions, and even money market funds providers. The following paragraphs describe how savings accounts work, how they differ from checking accounts, and what to look for when selecting an opening a savings account.

How Savings Accounts Work
By providing customers with savings accounts, banks and financial institutions are actually earning a profit, as the deposit is continually used by the financial institution for various investments. Since the bank is profiting from the deposits of savings account holders they are able to repay a portion of the profits to customers in the form of interest rates. Thus, savings accounts benefit both the customer and the bank on a long-term basis, and savings accounts with higher balances usually earn higher returns, as the bank rewards customers that make large long-term deposits. Savings accounts can be linked with checking accounts and set up to accept automatic transfers on a predefined residual basis. For example, the account holder can choose to transfer $50 every week from checking to savings, in order to create a sustainable and effective savings plan but is streamlined by the financial institution.

The Difference Between a Checking and Savings Account
The primary difference between a checking and savings account is the amount of interest offered. Most checking accounts do not offer interest, and are therefore only ideal for storing funds temporarily, and should not be used as a long-term saving solution. Most financial advisors recommend transferring any funds that will not be used within the next month to a savings account, in order to let the funds incur interest rather than letting them sit dormant within a checking account. Most financial institutions will allow you to link your debit card to both your checking and savings account, so that you can easily withdraw funds from both accounts at an ATM or point-of-sale machine (POS). Aside from the difference in interest, checking accounts also usually require a minimum deposit, while savings accounts can be opened with as little as one dollar.

What to Look for When Choosing and Opening a Savings Account
The first factor you’ll want to consider when comparing savings accounts is interest, as this will ultimately dictate how much of a return will be received in the long-term. Preferably, you’ll want to choose a savings account that has fixed interest rates rather than variable, as these will be more likely to remain stable throughout the account duration. Variable interest rates are commonly adjusted by financial institutions, so there is no way to calculate or estimate a specific return amount with savings accounts that offer variable interest rates. Some of the best interest rates and contract terms can be found within online high-interest savings accounts, as online financial institutions do not carry as much overhead costs as physical branches. Online savings accounts can be opened relatively easily, and opening deposit funds can be transferred from another bank account or financial institution instantly. Anyone can be approved for savings account, as long as they are over the age of 18 and have adequate photo identification.

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