A savings account is a bank account designed to hold money you're not spending right now

A savings account is a deposit account at a bank or credit union where you can store money and earn interest on it. The bank pays you a small percentage of your balance as interest — usually between 0.01% and 5% per year, depending on the account and the bank. You can add money to the account whenever you want, and you can withdraw it, though some accounts limit how many withdrawals you can make per month without a fee.

The main difference between a savings account and a checking account is purpose. A checking account is built for frequent transactions — paying bills, getting cash, making purchases. A savings account is built to hold money and let it grow. Banks encourage this by paying interest on savings accounts but not on checking accounts, and by limiting withdrawals rather than encouraging them.

Savings accounts are FDIC-insured at most banks, which means if the bank fails, the government guarantees your money up to $250,000 per account owner per bank. This makes them one of the safest places to keep money.

Key Takeaways

  • A savings account holds money and pays you interest on your balance, while a checking account is for frequent spending and usually pays no interest.
  • Interest rates vary widely by bank and account type, ranging from nearly 0% at traditional banks to 4% or higher at online banks.
  • Most savings accounts limit the number of withdrawals you can make per month without paying a fee, though this limit is often higher than it used to be.
  • Your money is protected up to $250,000 per account owner per bank through FDIC insurance, making savings accounts very safe.

How interest works on a savings account

When you keep money in a savings account, the bank uses that money to make loans to other customers. In return, the bank pays you interest — a percentage of your balance. If you have $1,000 in an account earning 2% annual interest, you'll earn about $20 per year (though the bank usually calculates and adds interest monthly, so you earn a small amount each month).

Interest rates change based on what the Federal Reserve does with its benchmark interest rate. When the Fed raises rates, banks typically raise the rates they pay on savings accounts. When the Fed lowers rates, savings account rates fall too. This means the interest you earn today might be different from what you earn next year.

Some accounts offer a fixed rate that doesn't change for a set period. Others offer a variable rate that can change at any time. Online banks and credit unions often pay higher interest rates than traditional brick-and-mortar banks, sometimes 10 to 20 times higher.

Withdrawal limits and how they work

Most savings accounts allow you to withdraw money whenever you want, but many have a limit on how many withdrawals you can make per month without paying a fee. This limit is often six withdrawals per month, though some banks allow more and some allow fewer. The limit usually applies to transfers and electronic withdrawals, not to withdrawals you make in person at a branch or at an ATM.

If you exceed the withdrawal limit, the bank charges a fee — typically $10 to $35 per extra withdrawal. Some banks waive the fee if you keep a high balance or maintain direct deposit. Others have removed the limit entirely, especially since the pandemic.

This withdrawal limit is one reason savings accounts are different from checking accounts. It's designed to encourage you to keep money in the account rather than moving it around constantly.

Minimum balance requirements and fees

Some savings accounts require you to keep a minimum balance — often $25, $100, or $500 — to earn interest or avoid a monthly fee. If your balance drops below the minimum, the bank may charge you a monthly maintenance fee of $5 to $15, or stop paying interest on your account.

Other accounts have no minimum balance at all. Online banks are more likely to have no minimum, while traditional banks more often require one. It's worth comparing accounts to find one that matches how much money you typically keep in savings.

Beyond the monthly maintenance fee, watch for other charges: fees for falling below the minimum, fees for exceeding withdrawal limits, fees for using an out-of-network ATM, and fees for closing the account early if it's a promotional account.

Types of savings accounts

A regular savings account is the most basic type. You can deposit and withdraw money freely (within withdrawal limits), and you earn interest on your balance. Interest rates are usually low — often under 1% at traditional banks.

A high-yield savings account is offered mostly by online banks and pays significantly higher interest — currently 4% to 5% or more. The catch is that you usually can't visit a physical branch, and you access your money online or by phone. These accounts have the same FDIC insurance and the same withdrawal limits as regular savings accounts.

A money market account is a hybrid between a savings account and a checking account. It usually pays higher interest than a regular savings account, allows you to write checks or use a debit card, but has higher minimum balance requirements and lower withdrawal limits.

A certificate of deposit (CD) is different — you agree to leave your money in the account for a set period (three months to five years), and in return the bank pays you a higher interest rate. If you withdraw the money before the term ends, you pay a penalty.

How to open a savings account

To open a savings account at a bank or credit union, you'll need to provide your name, address, Social Security number, and a form of ID. Most banks now let you open an account online without visiting a branch. You'll need to fund the account with an initial deposit — the amount varies by bank, but many have no minimum.

You can transfer money from another account, deposit a check, or set up a direct deposit from your employer. Once the account is open, you can add money anytime and withdraw it (within your withdrawal limit) anytime.

If you're opening an account at a credit union instead of a bank, you may need to become a member first. Credit unions often have lower fees and higher interest rates than banks, but membership is usually limited to people who work in a certain industry, live in a certain area, or belong to a certain organization.

Savings accounts versus other places to keep money

A savings account is safer than keeping cash at home — your money is insured and you earn interest. It's safer than a checking account if you want to avoid spending the money by accident, because withdrawal limits make it slightly harder to access.

A savings account is less risky than investing in stocks or bonds, but it also earns less over time. If you're saving for something you'll need in the next few years, a savings account is a good choice. If you're saving for retirement or something 10+ years away, investing might grow your money faster.

A CD pays more interest than a savings account, but you can't touch the money without a penalty. A money market account offers more flexibility than a CD but usually requires a higher minimum balance. The right choice depends on when you'll need the money and how much you have to save.

Frequently Asked Questions

Can I lose money in a savings account?

No, your balance won't go down unless you withdraw money or the bank charges fees. FDIC insurance protects your money up to $250,000 if the bank fails. The only way to lose purchasing power is if inflation rises faster than the interest you earn, which means your money buys less over time.

How often does the bank add interest to my account?

Most banks calculate and add interest monthly, though some do it daily or quarterly. The more often interest is added, the more you earn, because you earn interest on the interest from previous months. This is called compounding.

What's the difference between a savings account and a money market account?

A money market account usually pays higher interest and lets you write checks or use a debit card, but requires a higher minimum balance and limits how many checks you can write per month. A regular savings account has lower minimums and higher withdrawal limits but pays less interest.

Do I have to pay taxes on savings account interest?

Yes, interest you earn is taxable income. The bank will send you a 1099-INT form at the end of the year if you earned $10 or more in interest. You report this on your tax return. The interest is taxed at your regular income tax rate, not as capital gains.

Can I have multiple savings accounts?

Yes, you can open savings accounts at different banks or multiple accounts at the same bank. Each account is insured separately up to $250,000, so having multiple accounts increases your total insurance coverage. Some people use separate accounts to save for different goals.