Savings Account Basics

It's important to understand the specifics about savings accounts before deciding on one that's right for you.

A savings account is an easy and safe place to keep your money.  Understanding the different types of savings accounts and how they work can help you to make the best choices for saving your money.

A savings account is a safe place to keep some of your money that you do not immediately need. It’s a liquid place to save money. That means that even though the bank is keeping it for you, you have access to it.  Although savings accounts are not as liquid as a checking account, if you need the money, you can still get to it. In the meantime, you earn interest on the amount of money that you leave in the bank. Interest rates with savings accounts are usually pretty low. Therefore, for a long term savings plan, a savings account may not be your best choice.

Types of savings account
There are two basic types of savings accounts.

• Passbook Account.  With a passbook savings account, the bank gives you a booklet that you use to record deposits, withdrawals, and the interest.  It is FDIC insured up to $100,000 ($250,000 for retirement accounts).  It usually has few fees, a low or no minimum balance requirement, and a low interest rate.
• High Yield Savings Account.  These types of savings accounts are also FDIC-insured.  The higher the balance that you maintain in the account, the higher interest rate the bank is usually willing to give you.  However, you cannot usually use checks with this type of savings account but you may be able to link it to your checking account for deposits and withdrawals. You can compare rates on high yield savings accounts by visiting http://www.lendingtree.com/HighYieldSavings/HighYieldSavings.asp.

When to use a savings account
A savings account can be a good choice for keeping your money in certain situations.

• Consider a savings account if you are setting aside money for a purchase in the next few months.
• A savings account can be useful for an unexpected expense.
• At some banks you can tie a savings account to a checking account.  This gives you a nice backup to your checking account in case you need to transfer money into it.
• If you have a sum of money to invest but are not sure how you want to invest it yet, a savings account is a smart place to hold it.  In a checking account, you can be tempted to spend it.  You can at least make a small amount in interest while you decide how to invest your money.

Accessibility of a savings account
One of the biggest differences between a savings account and any other savings investment accounts is the ease with which you can access the money. If you keep your savings in stocks or mutual funds, most likely you will have to pay a tax penalty if you sell them to access your money. There is no tax penalty associated with a savings account.  That makes a savings account a good choice for money that you need to use be able to use.  However, be sure to check your bank to make sure there are no fees for closing the account, withdrawing a certain amount, etc.

Related Topics:

• Financial Literacy Guide
• Managing your money
• Smarter spending