What Is A Savings Account And How Do Savings Accounts Work

by Enid Kathambi, Money Columnist

Published in Money and Finance on 2nd March, 2020

What is a savings account, and how do savings account work? Maybe you have some extra cash to spare, and everyone is telling you to put it in a savings account. The only problem is that you have no idea how different it is from a checking account.

Well, one holds a savings account with a financial institution for interest-earning deposits. One can hold a savings account with the traditional financial institutions or an online financial institution. Most financial institutions, like banks, both online and traditional banks, and credit unions, offer savings accounts.

savings account

Opening a savings account

Openings a savings account is an easy task that you can do online or by visiting a physical branch of your preferred financial institution.

We highly recommend looking around and comparing your options before opening a savings account with any instructions.

Why? Because some financial institutions have higher rates of interest while others have higher fees and minimum balances.

Have your details available when opening a savings account. These include your Social Security Number (SSN), telephone number, your address, your name and a picture.

SSN is important because interest earned in the savings account is a taxable income. During the taxing time, your financial institution should send you the 1099-INT form in case you have more than $10 of income from interest.

Depending on the financial institution, you might be required to deposit some money when opening the account as a minimum deposit. Some financial institutions will also allow you to fund the account later on.

How do savings accounts work

Financial institutions use deposit accounts as a source for lending funds. These deposit accounts include savings accounts. The financial institution earns interest from lending these funds to lenders. It, however, does not mean you cannot access your savings when you want to withdraw.

Money in your savings account will earn you some income, depending on the financial institution's interest rate. These rates vary from one institution to another. Also, the institution is at liberty to increase or lower the interest rate.

Interest rates for savings account also depend on the federal funds rate. The federal funds rate is the inter-bank lending rate, which is the rate that banks use to lend each other money from their reserves at any given point.


You can withdraw as much money as you want from a savings account. However, there is a cap by the federal law to the number of times you can withdraw in a month at six (6) times. The federal law applies to all savings account in the US. In case you supersede this limit, the financial institution can convert your account into a checking account, close it, or charge you.

You can deposit money to your savings account by:

Depositing cash

If you have cash, you can do the traditional cash depositing through the institution's main bank or branches. With the current technological advances, it is also possible to deposit cash to your accounts using an ATM.

Direct depositing

You can have your employer deduct the money you want to save from your salary. Your employer will then do a direct transfer of the money to your savings account. This money will never hit your checking account.

Check depositing

In case you have a check, you can deposit it directly in your savings account rather than taking it to your checking account. The check will, however, take a day or two to clear, depending on the institutions regulations.

Also, thanks to advancements in the banking industry, most banks are making it possible for you to deposit a check from your mobile device. You do not have to get up from the couch to take that check to a savings account.

Internal transfer

If you have a checking and a savings account with the same institution, then you can do internal transfers. These transfers are instantaneous.

Electronic (EFT) transfers - an EFT is an electronic fund transfer from one bank to another. If your checking bank does not offer excellent rates, you can move your funds to a savings account held with a credit union or an online bank through an EFT.


Advantages of a savings account

  • A savings account is an excellent place for you to build an emergency fund. If you do not want to use your checking account to save money for a rainy day or a particular goal, then use a savings account. It is also perfect for you to stash your money if you are a spendthrift. The limit in withdrawals ensures you do not use your savings.
  • A savings deposit account is a haven for your money thanks to the FDIC (Federal Deposit Insurance Corporation). The FDIC insures deposits in savings accounts across all financial institutions across the US. In case the bank fails, you are guaranteed to get up to $250,000 of your savings. However, if you were holding your money under the mattress and it is stolen or burns in a fire, you will not get at least $250,000 back.
  • A savings account is an excellent for you to earn passive income, little as it may be. Checking accounts do not earn you any interest, and if they do, it will be little money. Why not put the money you are not using in a savings account and earn some interest income? Your money should always be working for you, regardless of where it is lying.
  • If you have a savings account with the same institution where you have a checking account, then you will have more convenient and efficient services. Transactions between the same financial institutions are usually real-time. In case you do transfers or withdrawals between your checking and savings accounts, you will be doing it in real-time.
  • With a savings account, you can keep track of your goals. In case you need to save money for different goals like buying a car or a house, then you can open several savings account for each goal. From here, you can track the progress of each goal.

The downside of savings accounts


Although opening a savings account is free, you might have to pay some hefty fees like monthly and annual fees. The financial institution will charges you these fees so that you can keep maintaining your savings account with them.

Minimum balance

Some financial institutions have a minimum balance that you must maintain. If the institutions minimum balance is $1000, then your savings must always have $1000 that you are not allowed to withdraw or utilize in any way. The only possible way for you to access this $1000 is by closing your savings account.

Limited withdrawals

Savings accounts have limits to withdrawals. At the moment, you cannot withdraw from your savings accounts more than 6 times per month.

Now that you know what a savings account is and how it comes, you can start saving some mullah for that long-deserved vacation or car.

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