A savings account is a bank account designed to hold money you are not spending right now, and the bank pays you interest on the balance

When you open a savings account, you deposit money into it. The bank then lends that money to other customers—for mortgages, car loans, credit cards, and business lines of credit. The bank keeps the difference between what it pays you in interest and what it charges borrowers. You earn money straightforward by letting the bank use your funds. The interest rate varies by bank and by the current economic environment, but as of 2024 it ranges from near zero at some institutions to around 4 to 5 percent at online banks.

The account itself is separate from your checking account. Money in a savings account is not meant to be withdrawn frequently; it sits there and grows. Banks enforce this by limiting how many withdrawals you can make per month—often six, though this rule has become less strict since 2020. If you exceed the limit, you may face a fee. The point is not to punish you, but to distinguish savings from checking, where you expect to move money in and out constantly.

Your money is insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per account holder per bank. This means if the bank fails, the government guarantees you get your money back up to that limit. This protection is automatic; you do not need to do anything to set up it.

Key Takeaways

  • A savings account holds money you are not spending and earns interest, which is the bank's payment to you for letting it lend your funds to other customers.
  • Interest rates vary widely by bank—online banks typically offer higher rates than brick-and-mortar branches—and change based on Federal Reserve decisions.
  • Banks limit withdrawals per month (often six) to keep savings accounts separate from checking accounts, and may charge a fee if you exceed the limit.
  • The FDIC insures balances up to $250,000 per account holder per bank, so your money is protected even if the bank fails.
  • Interest compounds, meaning you earn interest on your interest, so the longer money sits in the account, the more it grows.

How interest is calculated and when you receive it

Banks calculate interest on your balance using one of two methods: straightforward interest or compound interest. straightforward interest is straightforward—the bank multiplies your balance by the interest rate and pays you that amount. Compound interest is more generous: the bank calculates interest on your balance plus any interest you have already earned, then adds that to your account. Most savings accounts use compound interest, often compounded daily, which means the calculation happens every single day.

The interest rate a bank advertises is called the Annual Percentage Yield, or APY. This is the total return you will receive in one year if you make no deposits or withdrawals and the rate does not change. If a bank offers 4.5 percent APY and you have $10,000 in the account, you will earn roughly $450 in one year (the exact amount depends on how many days are in the months and how the bank compounds). The bank deposits this interest directly into your account, usually monthly, though some banks do it quarterly or even daily.

Interest rates are not fixed. Banks change them based on what the Federal Reserve does with its benchmark interest rate. When the Fed raises rates, banks typically raise the rates they offer on savings accounts. When the Fed cuts rates, banks cut theirs. This can happen multiple times per year, so the rate you earn today may be different six months from now.

The difference between savings accounts and other places to keep money

A checking account is designed for frequent transactions. You write checks, use a debit card, set up automatic bill payments, and move money in and out constantly. Checking accounts typically pay little to no interest—many pay zero—because the bank expects the money to move quickly. A savings account is the opposite: you deposit money and leave it alone, and the bank rewards you with interest.

A money market account is a hybrid. It works like a savings account—it earns interest and the FDIC insures it—but it also gives you limited check-writing ability and a debit card. Money market accounts often pay slightly higher interest than savings accounts, but they also require a higher minimum balance to open and may charge fees if your balance drops below that minimum.

A certificate of deposit (CD) is an agreement: you give the bank a sum of money and promise not to touch it for a set period—three months, six months, one year, five years. In exchange, the bank pays you a higher interest rate than a savings account offers. The catch is that if you withdraw the money before the term ends, you pay a penalty, usually a few months' worth of interest. CDs are useful if you know you will not need the money for a specific length of time.

How to open a savings account and what you need

Opening a savings account takes minutes. You can do it online, by phone, or in person at a bank branch. You will need a government-issued ID (a driver's license or passport), your Social Security number, and proof of your current address (a utility bill or lease). Some banks also ask for your employment information, though this is not always required.

You will choose how much to deposit initially. Many banks have no minimum, though some require $25 or $100 to open. You will also choose whether you want the account linked to a checking account at the same bank—this makes transfers between accounts when ready and free. The bank will assign you an account number and routing number, which you use to receive transfers from other banks or to set up direct deposit of your paycheck.

Online banks (like Ally, Marcus, or Discover) typically offer higher interest rates than traditional banks because they have lower overhead costs. However, they have no physical branches, so you cannot walk in with cash. Traditional banks (like Bank of America or Wells Fargo) offer lower rates but have branches where you can deposit cash and speak to someone in person. Credit unions, which are member-owned rather than shareholder-owned, often offer competitive rates and may have lower fees.

Fees and rules that affect your savings

Most savings accounts charge no monthly fee, but some do. Banks may charge a monthly maintenance fee (typically $5 to $10) if your balance falls below a minimum or if you do not meet other conditions. Some banks waive the fee if you set up direct deposit or if you maintain a certain balance. Read the account terms before you open it.

As mentioned, banks limit the number of withdrawals you can make per month. The Federal Reserve's Regulation D originally capped this at six per month, though this rule was suspended in 2020 and has not been fully reinstated. Individual banks now set their own limits, which range from six to unlimited. If you exceed the limit, the bank may charge a fee or close the account. This rule exists to keep savings accounts separate from checking accounts.

Some banks charge a fee if you transfer money out to another bank too frequently. Others charge an overdraft fee if you accidentally withdraw more than your balance (though this is rare with savings accounts since you cannot write checks). Always ask about fees before you open the account, and read the fee schedule the bank provides.

How your money moves in and out of a savings account

Money enters a savings account in several ways. You can deposit cash at a branch. You can transfer money from another account at the same bank, which is when ready. You can transfer money from an account at a different bank using the ACH system (Automated Clearing House), which takes one to three business days. You can set up direct deposit of your paycheck, which also takes one to three business days on the first deposit, then becomes automatic. Some banks let you deposit checks by taking a photo with your phone.

Money leaves a savings account the same ways. You can withdraw cash at a branch or ATM. You can transfer money to another account at the same bank when ready. You can transfer to an account at a different bank via ACH, which takes one to three business days. You cannot write checks on a savings account (that is what checking accounts are for), and you cannot use a debit card, though some banks offer a savings debit card with restrictions.

The timing matters if you are counting on the money. If you transfer from your savings account to pay a bill, and you use ACH, the money will not arrive for up to three business days. If you withdraw cash at an ATM, it is when ready. If you transfer between accounts at the same bank, it is when ready. Plan accordingly.

Why interest rates change and what affects them

The Federal Reserve, which is the central bank of the United States, sets a benchmark interest rate called the federal funds rate. This is the rate banks charge each other to borrow money overnight. When the Fed raises this rate, banks raise the rates they offer on savings accounts because they can earn more by lending money out. When the Fed cuts the rate, banks cut the rates they offer because they earn less from lending.

The Fed changes its rate based on inflation and employment. If inflation is high, the Fed raises rates to cool down the economy and discourage spending. If unemployment is high or the economy is weak, the Fed cuts rates to encourage borrowing and spending. These decisions happen roughly every six weeks, and the Fed announces them publicly.

Individual banks also set their own rates based on competition. If one online bank offers 4.5 percent APY and another offers 4.0 percent, customers will move their money to the higher-paying bank. This competition pushes rates up. Conversely, if a bank wants to reduce the number of new savings accounts it opens, it may lower its rate. The rate you see today may not be the rate you earn six months from now, so check your bank's website periodically to see if the rate has changed.

Frequently Asked Questions

Can I lose money in a savings account?

No, the FDIC insures your balance up to $250,000, so you cannot lose the principal. However, inflation can reduce the purchasing power of your money. If inflation is 3 percent per year and your savings account earns 2 percent, you are effectively losing 1 percent in real value. This is why it matters to shop for higher interest rates.

What happens if I withdraw money before I planned to?

You can withdraw money from a savings account anytime without penalty. However, if you exceed the bank's monthly withdrawal limit, you may be charged a fee. Some banks also charge a fee if you close the account within a certain period (like 30 days), though this is less common now.

How much money should I keep in a savings account?

Financial advisors often recommend keeping three to six months of living expenses in a savings account for emergencies. The exact amount depends on your income, expenses, and job stability. A savings account is not meant for long-term investing; it is meant for money you may need within a few years.

Is it better to use an online bank or a traditional bank for savings?

Online banks typically offer higher interest rates because they have lower costs. Traditional banks offer lower rates but provide in-person service and the ability to deposit cash at a branch. If you rarely need to deposit cash and you want the highest rate, an online bank is usually the better choice. If you prefer face-to-face service, a traditional bank may be worth the lower rate.

Can I have multiple savings accounts at the same bank?

Yes, most banks let you open multiple savings accounts. Some people use separate accounts for different goals—one for emergencies, one for a vacation, one for a down payment. Each account is insured separately up to $250,000 by the FDIC, so if you have $250,000 in one account and $250,000 in another at the same bank, both are fully protected.