What Is the Definition of a Savings Account?

everything you need to know about opening a savings account. 

Why are savings accounts important?

Savings accounts are an important part of your financial wellbeing. If you haven’t ever saved money before, they’re the best place to get started building up money for your future — or for a rainy day. If you’re interested in investing, they’re an important place to keep liquid cash just in case. Regardless of your financial situation, having a savings account is essential.

What Are Savings and Why Are They Important?

For the most part, spending can be broken up into several categories: essentials, lifestyle, debt repayment, and savings. A balanced budget should allocate about 20 percent of your monthly income for some form of savings and/or debt repayment.

Larger, more expensive items seem more practical when their cost is spread out over a longer period of time. Each person uses their savings for different purposes:

• Large purchases like vacations, a wedding, or the down payment of a home
• An emergency fund in the event of a job loss or sudden expense
• Retirement accounts like IRAs or employer-sponsored plans

Savings are purposely less accessible than your checking. This money isn’t meant for everyday expenses; you shouldn’t be able to dig into your savings on a whim. Savings should build up over time without the interruption of impulse purchases.

Most accounts also feature some level of annual percentage yield with either a set or variable interest rate. This is one of the reasons why it’s important to move savings into a designated account. Otherwise, you may be missing out on passive income.

What are the Different Types of Savings?

How and where you store your savings can determine how much it grows over time. The “yield” of your savings account is the standard rate of growth over time. Typically, the less accessible your savings, the higher the interest rate.

Let’s take a look at some of the most traditional types of savings, keeping in mind that they have different limits to the number and kinds of transactions you can make.

• Savings accounts: A traditional savings account is ideal for the quick transfer and withdrawal of monthly savings allocations. These accounts are ideal for emergency funds, travel savings, or for other large purchases. The current national average of savings account interest is one percent according to the FDIC, the lowest of these options.
• Money Market Accounts: Money market accounts offer higher yields and fluctuate with the market itself. Banks may require a minimum balance to open and maintain the account or charge transaction and maintenance fees. In some cases, higher balances could unlock higher interest rates as well.
• Certificate of Deposit (CDs): Customers can buy insured Certificates of Deposit from banks and credit unions. This option tends to have the largest yield. Customers lock in their money for a set period of time and receive both the balance and interest when the CD expires.

After you’ve considered what type of account you prefer — and the amount of accessibility you prefer — it’s time to think about how much money you should keep in savings. 

How much should I keep in my savings account?

As mentioned above, many experts suggest that you regularly save about 20% of your income. The goal is to have about 3 to 6 months’ worth of income saved for emergencies, such as losing your job, or experiencing medical debt. 

This can seem like a daunting amount. However, the important thing is to get started early — and to start saving as often as you can. Even if the full 20% is more than you can manage for now, it’s still smart to put away whatever money you can (once you’ve covered your debt repayments too). In order to consistently save, it’s smart to set up a budget.

Many experts recommend using a savings calculator when creating budgets. In the popular 50/30/20 budget, 50 percent of your income goes toward essentials like housing costs, transportation, and monthly bills. Lifestyle choices like restaurants, bars, and shopping expenses should not exceed 30 percent. The final 20 percent goes into your savings account or to pay down debt.

After you’ve reached 3 to 6 months’ worth of emergency savings, however, it’s time to set your sights on an even bigger prize: actively growing your savings through investments and other passive income. 

Helpful Tips to Grow Your Savings

How can you make the most of your savings? It all comes down to what makes sense for you. Set aside larger amounts over time based on your monthly budget. If you feel like you’re rarely left with any money at the end of the month, a little organization could go a long way:

• Set Savings Goals: Budgets shine a light on where your paycheck goes each month. Transfer your surplus into a savings account at the same time each month. There’s nothing wrong with starting small. Even setting aside $20 builds the habit. Schedule gradual increases to your savings allocations until you reach your ideal amount.
• Save 20 Percent of Your Paycheck: Specialists recommend using a 50 30 20 budgeting calculator when creating budgets. In this setup, 50 percent of your pay goes toward essentials like housing costs, transportation, and monthly bills. Lifestyle choices like restaurants, bars, and shopping expenses should not exceed 30 percent. The final 20 percent goes into your savings account or to pay down debt.
  
• Consider opening an investment account: Getting started investing is a challenge for some, but it’s not as hard as you might think. Whether you’re considering investing in certain companies or opening up a brokerage account through a robo advisor, there are tons of options available. Be sure to read our guide to investing for beginners before you get started.
• Organize with Savings Apps: Budgeting apps like Mint help you organize your money both in the present and future. Make informed decisions before increasing your savings allocations using charts and projections to see how it will affect your long-term costs.

Savings are a way to create your own safety net. It allows you to look ahead and take control of your finances. Whether you choose to invest in a CD or open your first savings account, saving opens the door to new possibilities.