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Keeping all of your money in one place, like a checking account, may seem like the easiest option for managing your cash. But putting some of that money into a savings account can help you set some cash aside — and put your money to work for you by earning interest.
A savings account can be an easy way to put money aside for an emergency that might arise or for a future goal, like a vacation or big-ticket purchase — and it’s a more secure way to save than keeping cash at home.
Let’s take a look at some of the benefits of a savings account.
- You may not need a lot of money to open a savings account
- A savings account can make saving automatic
- Your money is accessible
- You can earn interest on your savings
- Your savings are protected
1. You may not need a lot of money to open a savings account
The process for opening a savings account can be pretty easy. It depends on the bank, but you can usually open a savings account with as little as $25 to $100. But in some cases, you may not need any money at all.
Depending on the bank, you may be able set up a savings account either in person or online.
Set up an account in person
Once you choose a bank or credit union to work with, head to the local branch.
You’ll be asked to fill out an application for a savings account. You may need to provide two forms of identification (including a government-issued ID), your current address, birthdate and contact information, along with the cash for your minimum opening balance, if the bank requires one. Once your information is reviewed and verified, the bank will let you know if you’re approved to open an account.
Set up an account online
If you prefer to open a savings account from the comfort of your couch, there’s good news: Some banks and credit unions offer online applications for their savings accounts.
Go to the financial institution’s website and visit its savings account section to find an application link. To complete the online savings account application, you’ll likely need to have the same information handy for your application as you would if you went to a branch to open your account. Once you submit your application, the bank will confirm your info and let you know whether your application is approved.
Does opening a savings account affect my credit score?
The short answer? No. There are several factors that affect your credit scores. These include payment history, credit utilization ratio, length of credit history, credit mix and types, and recent credit.
Although opening a savings account won’t impact your credit score, sometimes lenders will ask for information on your income and assets, which can include money in savings accounts, in order to make lending decisions. So, it can help to have money saved up if you want to take out a loan in the future.
2. A savings account can make saving automatic
Let’s face it — finding extra funds to set aside isn’t always easy. Setting up automatic deposits into your savings account can help you build up your savings without thinking about it.
You can choose to automatically direct deposit a portion of each paycheck or set up regular automatic transfers from your checking account to your savings account.
If you’re married or in a domestic partnership, a joint savings account can help you and your spouse easily save for mutual financial goals by allowing each of you to deposit money automatically into the account.
3. Your money is accessible
Some savings vehicles, like certificates of deposit (sometimes referred to as CDs), don’t allow access to your money without a penalty before the account’s maturity date. But with a savings account, you’ll typically have easier access to the funds in your account. And you may be able to transfer the funds to your checking account to write a check or use your debit card.
The accessibility of a savings account can make it an ideal emergency fund — you can put money away but access your cash when you really need it.
Just keep in mind that federal regulations may limit the number of transfers or withdrawals you can make from your savings account within a given period, depending on how you make the withdrawal and its purpose.
4. You can earn interest on your savings
Have you heard the saying, “A penny saved is a penny earned”? With savings accounts, it’s true that your money can help you earn more money.
As of October 2020, some savings accounts, called high-yield savings accounts, offer an annual percentage yield, or APY, of between 0.40% and 0.60%. For example, as of October 2020 a Credit Karma Savings account offers an APY of 0.40%.
Money in a savings account typically grows as a result of compound interest. With compound interest, you earn interest on the money you put into the account and on the interest you’ve already earned. Depending on your bank, your interest may compound daily, monthly, quarterly or annually. A higher APY will result in higher returns.
It may not seem like a lot of money at first, but over time you might notice a boost to your savings.
5. Your savings are protected
If you’re someone who prefers to put your savings in a piggy bank, consider this: If your money is stolen or destroyed in a flood or fire, you won’t be able to recoup your cash.
But if your money is in any deposit account, including savings, with an institution that’s insured by the Federal Deposit Insurance Corporation, or FDIC, it’s protected by the U.S. government. FDIC insurance will cover the money you deposited into the account, plus any interest earned, up to $250,000. And since that coverage applies per account, per bank, it can help you extend your coverage.
That means that if an FDIC-insured institution goes out of business, your savings are protected up to the $250,000 limit.
If you aren’t sure whether a savings account is the right savings tool for your goals, take some time to understand how savings accounts compare to other savings vehicles, such as certificates of deposit and money market accounts.
But if you’ve decided that opening a savings account is the right financial move for you, be sure to shop around and compare account terms and APY to help find the best account for your needs. And always read the fine print to understand any monthly fees, minimum balance requirements or other terms associated with the account.