What Is A Savings Account And How Does It Work?

Once we start to get hooked on saving our income, there would be a time when we want to see it grow. If we keep our money in a personal checking account, even after 10 years, it’ll remain the same (probably less because of inflation).

Whereas obviously, if we save and put it in the bank, it can effortlessly yield a modest amount of interest monthly. How? It is because of a savings account.

Generally, a savings account is our “saved for later” as it is aimed for a certain short-term or long-term goal. Having a savings account in the bank is a safe way to secure those weekly or monthly contributions in an insured way.

Considering that we may keep some of our money at home, in an accessible and tightly secured space, we cannot predict unfortunate circumstances such as theft, or fire. These instances will never refund our hard-earned money back. But through the FDIC, the money in your savings account can be insurance of $250,000 per account.

How does a savings account work?

How does a savings account work?

A savings account is just like the checking account where it will still allow deposits and withdrawals (but limited). The catch is, it earns interest on the balance.

As mentioned, a fact that we must remember is that the Federal Reserve Board Regulation D requires that an account classified as a ‘‘savings deposit,’’ is not permitted more than six convenient transfers or withdrawals per month from the account.

‘‘Convenient’’ transfers and withdrawals referred to are the following:

  1. Preauthorized, automatic transfers (including but not limited to transfers from the savings deposit for overdraft protection or for direct bill payments)
  2. Transfers and withdrawals initiated by telephone, facsimile, or computer
  3. Transfers made by check, debit card, or other similar order made by the depositor and payable to third parties

So what happens when we put our money in a savings account? The moment we decide to keep our savings to a savings account, it allows the financial institution to loan money to others. While we earn passive interest on our contributions, people pay their loans with charges. And that’s how it works!

Are savings account worth it?

Are savings account worth it?

It may seem to be a concern that the institution may lend your money to others, but there’s no need to worry. We must consider that first, there are a lot of us who have opted for a savings account and that is what banking is all about. Upon request, the bank can still issue the desired amount whenever needed.

Second, funds in the banks are insured. FDIC, remember? Whether there’d be an unlikely event or if ever a bank fails, our money is still safe and secured.

Third, how about that earning extra just by saving? Putting money to that checking account will just be more tempting for you to spend and even overspend. The interest rate may be big or small, but it is still likely free money. And who doesn’t like free?

And again, safety. You may invest on a life or even health insurance, but there are risks. Some would venture on the stock market, but returns are uncertain.

Keeping funds to a savings account is targeted for that goal and for the future. And while it sleeps inside a secure location, it earns interest and is insured. What else is there to ask?

What are the different types of savings accounts?

Different types of savings accounts

Now that we know where to stash our cash, there are different types of savings accounts to compare and choose from that perfectly suits our needs.

Basic Savings Account

Are you new to savings? A simple, easy-to-use and basic type of savings account is the basic savings account, also known as the Passbook Savings Account. Any transactions involving the savings will reflect on the passbook.

Usually, they offer a low interest but you can always shop around for the best rates. This options is still far safer than hoarding money inside the cabinet.

High-Yield Savings Account

If you want to your regular savings to earn 20 times or even more, this is the best option. When the balance grows faster, we can reach our goals faster too. Things that we must consider when choosing high-yield savings account are:

  • Annual percentage yield
  • Minimum deposit required
  • Minimum balance required
  • Withdrawal options

Money Market Accounts

This account works as a combination of a checking and savings account. Interest earned is higher than traditional savings and you can also issue checks or make withdrawals.

It is important to check each bank’s balance requirements or minimum deposit so you can be sure of best interest rates and not be hit by fees. If you have bigger funds and want to earn bigger interest rates, this is best for you.

Certificate of Deposit Account

More commonly known as CD, the deposit made to this account will be untouched until a certain period of time. This is the answer to that large financial long-term goal! Note that the longer the term, the higher interest will be paid.

There may be higher-interest options, but we should always go back to asking how much our budget is. Saving money is aimed at a goal especially for the future but it doesn’t mean that we must embrace discomfort and misery at present.

Whichever option that you choose for yourself is your own choice and being comfortable and happy with that decision will make everything worth it.

How much money should you keep in a savings account?

The main point of having a savings account is its purpose. Technically, if you simply want to forward your excess cash from your checking account to avoid spending it, your contributions will vary. It may be $100 to even a $1000.

If the goal is geared towards emergency savings, a 3-month to even up to a year of living expenses is the recommended amount according to experts. Some would have a separate account for savings and emergencies and that’s totally fine.


Higher returns are very rewarding and there are those of us who are far blessed to have more than their financial need.  And the bottom line is, it still goes back to – the budget.

Saving money is a great decision. Opening a savings account is greater. And enjoying your savings by living the life you have imagined, or by buying that car, building that dream house or simply achieving what you have originally planned, would be the greatest feeling, ever.

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