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No matter what your financial goals are or how much money you’re able to set aside, opening a savings account is a good idea. You won’t need a large pile of money to open an account at many banks, and a high-yield savings account at a federally insured institution is a great place to earn some interest on your funds.
Whether you’d like to open a savings account to house your emergency fund or as a place to save for financial goals, here’s how a savings account could be the right move for your finances.
Who should open a savings account?
If you’re only using a checking account, your financial tool belt is missing a crucial component — a savings account.
With a savings account, you can keep your extra funds separate from the money in your checking account that’s needed for day-to-day living expenses. You might want to save for a down payment on a home, tuck away funds for your dream vacation or build an emergency fund to help you tackle any financial hiccups that life throws your way.
Without having a savings account, it’s all too easy for the money in your checking account to become an all-purpose fund where you spend more than you intended. But if the funds were safely stored in your savings account, you might think twice about delaying your other financial plans for any impulse buys, like a fancy dinner or a new outfit.
When should you open a savings account?
The best time to open a savings account is as soon as possible.
“Everyone from children to seniors can open savings accounts, but they’re most effective when they’re started early,” says Jim Pendergast, senior vice president and general manager of AltLINE by The Southern Bank Co.
Starting earlier gives you more time to increase your savings before you’ll need it.
Benefits of a savings account
No matter your financial goals, having a savings account carries several important benefits:
A place for your emergency fund
An emergency fund is an essential component of a healthy financial foundation. A liquid savings account makes your money easily accessible, so you’ll be able to come up with funds in a pinch for expenses like an unplanned car repair or medical bill.
A savings account acts as an insurance policy against any sudden large or unexpected expenses, according to Scott Sturgeon, CFP and founder of Oread Wealth Partners.
“For example, if you lose your job, having six months of expenses in your savings account can mean the difference between missing a mortgage or rent payment and living comfortably while you find new employment,” says Sturgeon.
A place to save for planned purchases
As you save for a big expense, it can be tricky to stay motivated. It’s all too easy to want to spend any leftover money that’s in your checking account. That’s where a savings account can help.
“A savings account allows you to save for large things you want to purchase by keeping those funds siloed in a place where it’s harder for you to spend them,” says Sturgeon.
Regulation D used to limit savings account withdrawals to six a month, limiting the chances to derail your savings goals. Though the maximum has been lifted, most banks still limit the number of transfers savings account holders can make.
One offering that can help you add to your savings account regularly is the option to automate your savings. With many savings accounts, you can set up an automatic transfer of a portion of your regular paycheck.
As The Southern Bank’s Pendergast sees it, the beauty of automated transfers is that “you won’t miss the money that goes into your savings account, and you’ll have set up an automatic savings system.”
Higher return than checking accounts
Most checking accounts don’t earn interest, and those that do tend to earn savers a very low rate. It’s easy to find a savings account that earns a significantly higher annual percentage yield (APY) than what most interest-bearing checking accounts earn.
High-yield savings account APYs have been on the rise, and it’s not difficult these days to find one that earns a rate higher than 4 percent. Such accounts are mostly offered by online banks, which don’t have the expenses of maintaining branches and can pass along the savings.
Secure way to store savings
When your money is in a savings account at a bank insured by the Federal Deposit Insurance Corp. (FDIC), it’s protected up to $250,000 per depositor, per FDIC-insured bank, per ownership category.
Similarly, credit unions that are members of the National Credit Union Association (NCUA) offer accounts that are federally insured through the National Credit Union Share Insurance Fund (NCUSIF). Like FDIC insurance, this insurance carries a $250,000 cap for each account and owner.
How much money do you need to open a savings account?
The great news is that you won’t need a lot of money to open a savings account. Numerous financial institutions allow you to open a bank account without requiring a deposit.
Savings accounts at Citibank and Marcus by Goldman Sachs, for example, can be opened without a minimum deposit — but read the fine print. Some banks charge fees unless a certain amount is deposited into the account within a specified period.
Some banks will also require a higher deposit when you open the account. In general, a minimum deposit could be in the range of $25 to $100. But again, you can find banks that don’t require you to deposit any cash.
How do you open a savings account?
You can get started by comparing savings account rates on Bankrate. Once you’ve selected a bank account, it is time to gather your documents. You’ll likely need the following information to open a savings account:
- Social Security number
- Date of birth
- Identification, such as a driver’s license
- Contact information
- Bank account information to fund the new account, if applicable
If you have a credit freeze in place for security purposes, you may need to lift it temporarily when applying for a bank account.
Should I open a savings account online or in person?
While various banks operate exclusively online, you’ll also find many brick-and-mortar banks allow you to apply for accounts online as well as in person at a branch. These days, many people prefer the convenience of applying for a bank account from the comfort of their home.
But if you prefer the personalized touch of in-person banking, then a brick-and-mortar bank may be your best option.
What type of savings account is best for me?
If you’re not sure what kind of savings account is best, the answer likely boils down to what you want to get out of a savings account.
If you’re looking for the absolute highest interest rate, then consider an online-only high-yield savings account, since these institutions generally pay higher rates.
If you want to be able to talk to a local banker occasionally, as well as perform some or all of your transactions in person, then a traditional bank with branches is probably a better fit.
Opening a savings account at a bank where you already have a checking account is a way to make sure you’ll have quick access to your savings in case of an emergency. Having both accounts at the same bank may make for a quicker process of transferring money from savings to checking (and vice versa).
– Writer Sarah Sharkey contributed to a previous version of this article.