A savings account at a bank or credit union is a safe, convenient way to meet a financial goal. A basic savings account is a tried and true way to save for a down payment on a house, or build an emergency fund to handle unexpected expenses.
The money you put in a bank account is insured by the Federal Deposit Insurance Corporation (FDIC), an independent agency of the U.S. government. There's comparable protection for credit union deposits from the National Credit Union Share Insurance Fund. With this protection, your deposits are secure up to the maximum coverage that Congress has approved, even if your bank or credit union goes out of business.
The exact amount of insurance at each bank depends on two factors—the kinds of accounts you have and the way those accounts are registered:
Single accounts: Your total deposits in all the checking and savings accounts you own solely in your own name are currently insured up to $250,000.
Joint accounts: Your total share of all the checking and savings accounts you own jointly with others is currently insured up to $250,000.
Savings accounts give you the convenience and flexibility to make as many deposits as you like, whenever you like. Savings accounts offer few withdrawal restrictions and low minimum deposit requirements.
Be aware that some banks might require a minimum monthly balance and charge you a fee if your balance falls below that minimum. Not all banks require minimum balances. If your savings balance tends to be low, shop around and consider these fees when you choose your bank.
Many banks also offer flexible account alternatives for children, college students, senior citizens and for people whose income falls below certain limits. Comparison shop, and know what features the account provides.
One small inconvenience of a basic savings account is that you can’t pay your bills from it. You also can’t transfer money from it to any other person or financial institution. But you usually can transfer funds electronically from your savings account to your checking account, or withdraw funds from your savings account and deposit them in another. And keep this in mind: federal regulations limit you to six transfers of money from your savings account over any four-week period.
Savings accounts also pay interest. Since they are so conveniently flexible, basic savings accounts often pay the lowest interest rates of any bank savings alternative. However, banks compete for your deposits, and may offer substantially higher interest or other benefits for opening an account.
Most savings accounts pay compound interest. This 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. 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. 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. At times when interest rates are extremely low, the pennies you earn on your savings might not seem like much—but even they add up over time.
It pays to compare interest rates. Even a small difference in the rate can result in a substantial difference in the interest you earn. Use a savings calculator to see how a consistent approach to saving can make your money grow.
For more information about bank products, visit www.finra.org.
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