Fortune September 2, 2023
Lifestyle
You probably know that saving money is important. But where to stash those savings might be less obvious.
If you’re just starting out on your savings journey, a traditional savings account may be the answer. Whether you want to grow an emergency fund or save up for your dream vacation, a traditional savings account could help you get there. But before you open one, it’s important to understand how this type of account works and how it compares to other options.
A traditional savings account is a type of deposit account offered by banks and credit unions that allows customers to deposit money, earn interest, and withdraw funds when needed.
“These accounts are advantageous for consumers looking to separate their cash from their everyday spending and save for short-term goals like vacations or home renovations,” says Matt Steenson, head of consumer banking at PNC Bank.
There typically aren’t a lot of bells and whistles associated with traditional savings accounts. That said, there are certain features you should be aware of if you’re looking for a place to stash your cash.
Traditional savings accounts are offered at banks and credit unions and are insured by the Federal Deposit Insurance Corporation (FDIC). The FDIC protects these accounts up to $250,000 per depositor, per bank, per ownership category. If your money is held at a credit union, it’s backed by the National Credit Union Association (NCUA) up to the same limits.
Traditional savings accounts can also earn interest, helping your savings grow even faster. However, you may have to meet certain requirements to get the best interest rate.
Interest rates in general have been on the rise. However, traditional savings accounts usually offer lower rates than money market accounts or certificates of deposit, according to Steenson. For example, the national average savings account rate currently stands at 0.43%, according to the FDIC, compared to 0.62% and 1.76% for money markets and 1-year CDs, respectively.
Savings account interest is presented as an annual percentage yield (APY). The APY represents the effective annual rate of return, taking into account the effect of compounding interest. This refers to interest that you not only earn on the initial amount deposited (the principal) but also on the accumulated interest from previous periods. Banks usually compound interest on savings accounts monthly or daily.
Many savings accounts have a minimum balance requirement in order to open an account. That minimum might also be required to earn the highest advertised interest rate and/or avoid fees. Some accounts may even be tiered, with higher rates awarded to higher balances.
Minimum balance requirements vary quite a bit between different banks and accounts. However, traditional savings accounts tend to have low or no minimum balance requirements. The trade-off is that they also come with fewer perks and features.
Unlike a checking account, frequent withdrawals from a savings account are often discouraged by banks. “The goal of savings accounts is to move money less frequently—that is, park the money and allow it to grow,” says Jennifer White, senior director of banking and payments intelligence at J.D. Power.
Historically, under Regulation D, financial institutions were required to limit certain types of withdrawals and transfers from savings and money market accounts to a maximum combined total of six per month. These limited transactions included preauthorized or automatic transfers (like setting up an automatic bill payment from a savings account), online and mobile transactions, overdraft protection transfers, and more.
But in April 2020, because of the economic concerns surrounding the COVID-19 pandemic, the Federal Reserve Board announced an interim final rule to amend Regulation D, effectively removing the six-per-month limit. It's important to note that while the Fed no longer mandates these restrictions, individual banks and credit unions can still choose to set withdrawal limits or charge fees for excessive withdrawals from savings accounts.
A traditional savings account isn’t the only option you have when it comes to storing your money. There are a number of other savings vehicles that come with different features:
There are several benefits to having a traditional savings account—fewer fees, lower minimum balance requirements, and interest on your savings, to name a few. That said, there are some drawbacks to consider, too.
J.D. Power customer data finds that roughly 7 in 10 existing bank customers have savings accounts of some kind today, according to White. If you’d like to join their ranks by opening a traditional savings account, it’s fairly easy.
“If you prefer in-person interactions, bank branches are often found around almost every corner…make an appointment or simply walk in to ask for help opening your account,” White says. “If you prefer to do this process online, banks offer new account openings on their websites or even often in a mobile app.”
Whether you choose to open an account in person or online, there are just a few steps to follow:
A traditional savings account can be a great way for novice savers to get their feet wet since they don’t require large balances or charge a lot of fees.
That said, a traditional savings account may not always be the best choice, depending on your goals. For instance, if you’re hoping to grow your savings as quickly as possible, you may prefer a high-yield savings account. Or if you have a large amount of savings set aside for a future goal, it may make sense to deposit it in a CD.
In other words, the best type of account for your savings depends on your larger financial needs. “Evaluate how easily you want access to your savings and the level of risk you want to take around growing your money—this will help you decide which savings account type is best for you,” White says.
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