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People of all ages use savings accounts for a variety of reasons. These accounts are a great place to build up your emergency fund or save up for a shorter-term goal, like a vacation or a home repair.

If you don’t yet have a savings account, here’s everything you need to know about the bank product.

What is a savings account?

A savings account is a basic type of financial product found at banks and credit unions.

These accounts are federally insured up to $250,000, and offer a safe place to put your money while earning interest.

You can often open an account with little money, and they also provide you with the ability to quickly withdraw funds.

Because of their safety, reliability and liquidity, savings accounts are good places to keep money for a later date, separate from everyday spending cash. That includes money you might need for emergency expenses, upcoming goals or major costs.

For example, let’s say you want to save up for a vacation and you need $1,200. You could open a savings account and contribute $100 per month to meet your goal within a year. Plus, you would earn a little interest on your balance.

Alternatively, let’s say the air conditioning unit in your home breaks in the middle of the summer. If you kept your emergency fund in a savings account, you could quickly withdraw some of that money and get it fixed.

How does a saving account work?

You will open a savings account at a bank or credit union. You can open an account online or in-person. Either way, you will provide the institution with personal information to get an account. Then, you will deposit money into the account.

How much money you have to put into the savings accounts varies by financial institution. But your money is always safe and insured at a bank or credit union. Money kept in a savings account at a bank or an credit union is insured up to $250,000.

The rate you’ll earn on your savings account also varies and can change at any time. You can move money out of the account whenever you wish, but a law limits the amount of times you can do so.

How much should you keep in your savings accounts?

The amount of money you should keep in a savings account largely depends on your goal. If you’re using it as an emergency fund, most financial advisers suggest that you keep three to six months’ worth of living expenses in your account. For example, if you spend an average of $3,000 per month on costs such as your mortgage, car payment and food, you would stash anywhere from $9,000 to $18,000 in the account.

If it’s a specific goal — like a vacation, buying a house or purchasing a car — you would keep enough in the account to pay for that expense.

You can use a simple savings calculator to calculate your savings and see how long it might take you to save for a specific goal.

Are online savings accounts safe?

Online savings accounts are just as safe as savings accounts at traditional institutions. As long as the institution offering a savings account is insured, your deposits are safe. Look for banks — both traditional brick-and-mortar banks and online banks — that are insured by the FDIC (Federal Deposit Insurance Corporation) and credit unions insured by the National Credit Union Share Insurance Fund (NCUSIF). Both insure savings accounts up to $250,000 per depositor, per insured bank or credit union and per ownership category.

Savings accounts advantages and disadvantages

Like all financial products, savings accounts inherently come with some pros and cons.

Here are some of the advantages of savings accounts:

  • Safety: Money kept in a savings account at an FDIC-insured bank or an NCUSIF-insured credit union is insured up to $250,000, keeping your savings safe.
  • Growth: Savings accounts are generally interest-bearing, meaning you will earn interest on the money you save in the account.
  • Liquidity: Though savings accounts provide a place to stash money that is separate from your daily banking needs, they still let you make up to six withdrawals or transfers per statement cycle.

Here are some of the disadvantages of savings accounts:

  • Higher yields available elsewhere: The main downside is that interest rates on savings accounts may be lower than other savings products. Certificates of deposit and money market accounts, for example, can pay higher rates.
  • Accessibility restrictions: Federal regulations restrict the number of withdrawals or transfers you can make from a savings account to six per statement cycle.

How to maximize earnings from a savings account

The average interest rate on a savings account is a dismal 0.1 percent APY. Fortunately, there are several ways to boost your earnings.

Here are a few proven ways to get more out of a savings account:

  • Check out community and online banks: Big brick-and-mortar banks typically don’t offer the returns of these institutions. Online banks, in particular, tend to offer better yields: They don’t have the costs associated with brick-and-mortar banks and tend to pass those savings on to their customers. Here are the best rates for savings accounts.
  • Get a sign-up bonus: Some banks offer cash bonuses when you sign up for a new savings account. These bonuses can range in the hundreds of dollars. It’s worth keeping an eye on the best bank account bonuses and signing up for an account with a great bonus and a great rate.
  • Shop at credit unions: A credit union may offer you a better yield than you can find elsewhere. These not-for-profit organizations are member owned and tend to offer high rates and low fees.
  • Rely on the power of compound interest: Savings accounts offer liquidity, but your money will grow faster the less you touch your money. You can use a compound interest calculator to see how small deposits into a savings account quickly add up over time.
  • Watch out for fees: Some savings accounts advertise an attractive rate, but they come with fees that can eat into your interest rate. Do what you can to avoid incurring fees on your savings account. Better yet, shop for an account with very few fees.

Overall, it pays to shop around. You can get started by comparing the best high-yield savings accounts.

How to open a savings account

Start by thinking about your goals and why you need a savings account. For example, you may want to build up an emergency fund, or maybe you want to save for a vacation. Knowing your goal for the account will help you decide which savings account is best for you.

Next, make sure to comparison shop at more than just big banks. Keep in mind that online banks, credit unions and community banks tend to offer more competitive interest rates than large retail institutions. But make sure to compare more than just the interest rate. Take a look at monthly maintenance fees, minimum balance requirements and transaction fees. Also ensure the account has all of the features you need, like a mobile app.

Finally, check that the savings account you’re considering is insured by the FDIC if it’s a bank or the NCUSIF if it’s a credit union.

After choosing a savings account, the way you set it up will vary by bank or credit union. Some institutions require you to open an account at a branch, while others may require you to set everything up online. Either way, you’ll need to provide some general documents and information, including a driver’s license or state ID, your Social Security number, address, date of birth and other personal info. The institution will provide instructions on how to fund your account.

Other types of savings accounts

Savings accounts aren’t your only option when it comes to federally insured places to keep your money. There are other savings products offered by both banks and credit unions that are low-risk, liquid and interest bearing.

  • Money market accounts: On average, MMAs provide higher rates than savings accounts, but they may have higher minimum balance requirements. Like a savings account, withdrawals and transactions are limited to six per billing cycle. These accounts may come with an ATM card and checks.
  • Certificates of deposit: CDs are time-deposit accounts. They hold your money for a specific period of time. In exchange, they pay a guaranteed yield that’s generally higher than savings or money market accounts. The trade-off for the higher yield is that there is no liquidity. Unless you have a special type of CD, you’ll have to keep your money locked away for the duration of the term. If you withdraw cash early, you can get hit with a penalty that can eat up all of your interest earned and some of your principal.

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