Savings Accounts

Bank savings accounts have traditionally been one of the simplest and most convenient ways to save. These accounts typically have the lowest minimum deposit requirements and the fewest withdrawal restrictions. But they often pay the lowest interest rates of any of the savings alternatives. However, when banks are competing for your deposits, they may offer substantially higher interest or other benefits for opening a savings account.

Traditional savings accounts used to be called passbook savings accounts, since tellers would record your deposits and add the interest you'd earned in a small booklet called your passbook. These days, electronic records make passbooks unnecessary. But some banks still offer old-fashioned passbook accounts, especially for children's savings accounts.

Your Savings Account Interest Payments

Most savings accounts pay compound interest, which means that your earnings are added to the balance to create a larger base on which future interest is paid. The bank will tell you whether the interest compounds daily, monthly, or on some other schedule, and when the interest is credited to your account. The more frequently it compounds, the faster your earnings will accumulate—though with small balances the increases won't be very dramatic. You generally begin to earn interest as soon as the money goes into your account, and that interest continues to accrue until you withdraw.

The bank will also tell you the basic interest rate and the annual percentage yield (APY). The APY is larger than the basic, or nominal, rate since it takes into account the impact of compounding. Banks often advertise the APY since it more accurately reflects the amount of interest the account will actually pay, and it makes the savings account a more attractive place to park your money.

Online banks may offer higher interest rates than more traditional brick-and-mortar banks. That's because online banks tend to have lower overhead, and can pass their reduced costs onto consumers in the form of increased earnings rates. Before deciding on a savings account, it pays to compare interest rates, along with other features, such as convenience of making deposits and withdrawals. Even a small difference in the rate can result in a substantial difference in interest over time, depending upon the amount you put into the account.

Other Savings Account Features

With a basic savings account, you can make as many deposits as you like, whenever you like. And you can usually withdraw as much as you like when you need the money. However, some banks may require minimum opening balances for basic savings accounts, and some banks charge fees if your balance falls below that minimum. Other banks don't have minimum balance requirements, so if your savings balance tends to be low, you may want to consider these fees in choosing a bank account.

You can also ask if the bank offers low-cost savings accounts. Many banks offer more flexible alternatives for children, college students, and senior citizens, and for people whose income falls below certain limits. But the way these accounts work vary from banks to bank.

One thing you can't do with a basic savings account is transfer money to another person or institution, so you can't pay bills from your savings account. But you can generally transfer funds from your savings to your checking account electronically, or withdraw funds from one of your savings account and deposit them in another. You should be aware of Federal Reserve Regulation D, though, which limits you to six transfers from your savings account in any four-week period, whether these transfers are made electronically, automatically, or by phone.

Emergency Funds

It's a good idea to have a separate savings account to serve as your emergency fund. Most experts agree that's important to set aside enough money to cover your living expenses for three to six months in an account you use exclusively for this purpose. This money would come in handy, for example, if you were to stop earning income temporarily, or if you were faced with unexpected events, such as big medical bills, or any other expense that could arise without warning. Without savings, you might need to rely on credit cards and other borrowing to pay for emergencies, which could result in serious debt.