Please see information on Savings Accounts below.


Savings Accounts

Another key bank account type in the US is the savings account.

What is a Savings Account?

Most Americans have a savings account set up either for themselves or for family including children. Savings accounts are offered by most banks, financial institutions, savings and loans and independent companies.

A savings account is set up for a person to put money aside for the future. By being put into this account, the money is ‘locked away' – it is designed to stay where it is, growing in size thanks to collection of interest payments.

The money is not intended to be accessed for a set period of time (the time period alters according to account). In other words, the money cannot be used directly (for example by writing a check).

What are the Types of Savings Accounts?

Generally, you will find that there are the following main savings accounts:

  • Regular savings account
  • CD account
  • Business savings account
  • Business CD account
  • Savings account for Children/Youth

Most banks/financial institutions will have their own brand name for each account type but they will usually fall into one of the categories above.

What are the Rules of a Savings Account?

The types of accounts you can access may depend on the state in which you live, but there are rules which govern all savings account in the United States. These include such things as:

  • The account holder is authorized to make up to 6 withdrawals or transfers per month/statement cycle
  • There is no rule to how many deposits can be made into the account

How Much does it Cost?

Setting up a savings account is a relatively low-cost operation. Approach your bank or other financial institution if you want to set one up and they will go through the process with you. In some cases, you may only open a savings account if you already have a working checking account with the same institution.

Some savings accounts may carry a monthly or annual management fee if your daily account balance is below a certain amount (this varies according to account) and there may be penalties or other charges if you do not manage your account according to that institution's rules.

For example, if you make an unauthorized withdrawal or if you decide to transfer your account to another provider you may be charged a fee.

What is the Opening Deposit?

This depends largely on the providing company of your savings account. Some will allow you to open an account with as little as $25. The opening deposit is an important factor to compare when looking for a new savings account.

What Other Features Are There?

Most banks/savings accounts providers will offer a variety of savings accounts. These may be referred to as ‘regular', ‘High Yield', ‘Custodial for Youth' and so on.

Each account type will carry unique features – another area to compare. For example, a regular savings account will usually offer online management of the account, a set interest rate, monthly statements and so on. The interest rate and APY will also vary according to account.

What is APY?

The APY is the Annual Percentage Yield and shows the yield that your account deposit will earn over the term of a year. It reflects how much you are actually earning on the money in your account.

Unlike APR (Annual Percentage Rate) which is paid by you to the bank in exchange for borrowing (for a credit card or a loan), a person will look for the highest APY when searching for a savings account. With an APR, the person will look for the lowest rate.

What is a CD Account?

A CD or Certificate of Deposit account is often offered alongside savings accounts by banks and other financial institutions. CD accounts are very similar to savings accounts – they are relatively low-risk and allow you to grow your money over time.

What is the Difference between Savings and CD Accounts?

CD accounts have a fixed term – usually this will be either three months, six months or between one and five years. During this term, the account will carry a fixed interest rate.

In some cases, CD accounts will carry a feature which allows the customer to change or ‘adjust' the interest rate just one time during the term of the account. CD accounts are especially popular when there is a belief that interest rates are going to rise.

In some cases you may index a CD account onto the stock market or other indices. This will place your money at a certain level of risk (though this is still far lower than if you were to directly trade shares). Speak to your financial advisor or bank before choosing this option.

Generally, the longer the term of a CD account, the higher the yield.

How is Interest Calculated?

In most cases, interest is accrued on a daily basis and compounded once a month.

Who is Eligible for a Savings or CD Account?

Opening a savings or CD account is a fairly easy action. Search for the right account – look at the important features including fees, rates and yield – and once you have found one, apply directly or follow that company's application process.

Generally, the rules for eligibility are the same as for a normal checking account. You will need to be over a certain age benchmark - this will be set either by your state or by the bank, so check this in advance. The age may also vary according to which account type you apply for.

You will also need to be a full US citizen and resident of your state. Generally you will need to provide proof of identification and address in order to open a savings or CD account.

What are the Benefits of Savings Accounts?

Savings accounts give us the possibility to put money aside for the future – perhaps a wedding, vacation, car, home or even an emergency – at a low level of risk. Unlike entering the stock market as an investor or even trading currencies or derivatives, a savings account simply gathers interest over time on money that is already in existence.

Savings accounts are easy to manage and there are many on offer, giving you lots of choice. You can even choose to open a CD account, which sets interest at a specific rate for a specific amount of time. This is a great way to hedge against fluctuating interest rates.

Many people set up accounts for their children so that they may have a kick-start later in life.

What are the Disadvantages of Savings Accounts?

A savings account may be relatively low in risk factor but it might not gather enough yield for your purposes. Some people want to grow their money more – and choose instead to place their money into a fund or even open a direct trading account.

However, this latter option does call for a high level of investment knowledge and a healthy appetite for risk. Generally it is advised to seek independent financial advice before entering the investment game.

A CD account has its disadvantages because it is set for a specific period of time – if you wish to make withdrawals before a CD account matures, you may incur penalty fees (check this in advance).

All savings and CD accounts may carry certain charges depending on your account balance and management. Always check these before opening an account.


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