Saving money is key to reaching your financial goals. Whether building an emergency fund, saving up for a major purchase, or building wealth, a savings account can be an important tool in your overall financial plan. Savings accounts offer an accessible place to keep your cash while also allowing you to earn interest on your account balance.

In the following guide, you’ll learn what a savings account is and how it works. You'll also learn the benefits of savings accounts, what different types there are to choose from, and how to open an account of your own. All so you can save with confidence.

Savings Account Explained

A savings account is a deposit account typically held at banks or credit unions. Unlike checking accounts, which are used for everyday spending, savings accounts are ideal for accumulating funds for short and long-term financial goals.

Savings deposits are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Association (NCUA) up to maximum limits, protecting funds in case the financial institution fails. Savings accounts also pay interest on the account balance and allow the account holder to make withdrawals or deposits, providing flexibility and liquidity.

Benefits of Having a Savings Account

A savings account can be an important tool for managing money and helping you reach financial goals. While there are several options for depositing money you don’t plan to use right away, the benefits of a savings account include liquidity, convenience, and security. Here’s a closer look at why many individuals include savings accounts in their overall financial plans. 

Steady, Reliable Growth

When comparing a checking account vs. a savings account, interest is often a differentiating factor. While checking accounts typically pay low or zero interest, savings accounts often provide higher interest rates, offering steady growth on your deposits.

While interest rates on savings accounts can fluctuate over time based on economic conditions, your principal remains protected. This allows your account balances to consistently accumulate interest without the risk of loss that comes with other types of investments, such as stocks and mutual funds. However, there's a risk of loss for any portion of deposited funds that exceed the FDIC or NCUA limits.

Compound Interest

Compound interest allows your savings account to reliably grow over time without the need to actively manage it. It works by paying interest on both the savings account's initial principal and accumulated interest, enabling even modest interest rates to turn small deposits into larger balances over time.

Consider a savings account opened with a $1,000 deposit, earning 2% annual interest. Although many banks compound interest more often than annually, we’ll assume annual compounding for simplicity's sake. After the first year, that account will have earned $20 interest on the original principal. In year two, the interest begins accruing on the $1020 balance, resulting in interest of $20.40 in year two. While the amount earned is only marginally higher than the first year, this cycle continues with interest continually compounding on slightly larger principal amounts. After 10 years, the account will have earned $219 in interest.

Liquidity and Accessibility

A savings account can be appealing to those who want to maintain liquidity. You can easily access the funds at any time by transferring money to another linked account or making a withdrawal at an ATM or bank branch. 

Some banks place a limit on the number of monthly withdrawals from savings accounts, which can typically result in either a small monthly fee or a fee for each withdrawal over the monthly limit.

Overdraft Protection

Some financial institutions allow you to link savings and checking accounts, providing overdraft protection. This feature may prevent costly fees, bounced checks, and declined transactions by automatically transferring money from the savings account to the checking account to cover any purchases or withdrawals that would drop the account balance below $0. 

Although there may be a fee for each overdraft transfer, the added protection helps you avoid larger overdraft charges that could result from mistakes or miscalculations. It can also be a significant benefit for those managing a tight budget.

Emergency Funds and Savings Goals

Savings accounts are often used as a dedicated emergency fund for life’s unplanned expenses. Generally, experts recommend keeping at least three to six months' worth of essential living expenses in your emergency fund. That way, emergency savings are available to cover expenses like home repairs, medical bills, or an unexpected loss of income. 

You may also use a savings account for defined savings goals, such as vacations, education costs, or a downpayment on a home. Setting up individual accounts for each goal can help with budgeting and deter you from taking withdrawals that are not associated with the planned expenditure. 

Potential Drawbacks to Consider

While savings accounts are an important tool for many financial plans, there can be potential drawbacks. Typically, the following issues can be addressed by carefully comparing savings account options and strategically deciding how much money to keep in your account. 

Lower Returns

Due to their low risk and liquidity, savings accounts typically pay lower interest rates when compared to other investment options, such as stocks, bonds, or certificates of deposits (CDs). While money tucked away in a savings account reduces the risk of loss, if the inflation rate is higher than an account’s interest rate, you also risk losing purchasing power over time. In addition, keeping funds in a low-interest investment means you're missing out on the opportunity to potentially earn higher returns by choosing a different investment option.

Account Fees

Some savings accounts charge a monthly account fee, which can diminish your account balance over time. You may be able to avoid these fees by maintaining a minimum balance or meeting other requirements, such as setting up automated deposits or choosing electronic statements.

Withdrawal Limits            

Savings accounts typically limit the number of free withdrawals you can make per month. Withdrawals over the limit may result in a small monthly fee or a fee for each withdrawal, potentially diminishing the account balance. If you plan to use the funds for everyday expenses or anticipate frequent withdrawals, a checking account may be more appropriate for your needs.

Easy Access

While many investors appreciate the flexibility and easy access to funds offered by a savings account, it can be a challenge to some savers. The liquid nature of savings accounts can undermine savings goals by enabling impulse spending. Opening separate accounts for each goal or choosing an account with built-in goal-setting features can help mitigate this risk. 

Types of Savings Accounts

There are several types of savings accounts to choose from, each tailored to meet specific financial needs and goals. Some of the most common options include:

  • Traditional Savings Account: This type of savings account pays low to moderate interest rates and offers withdrawal flexibility. It is commonly used for emergency funds or short-term savings goals.
  • High-Yield Savings Account: Offers higher interest rates than a traditional savings account, but it may have larger required minimum account balances.
  • Money Market Savings Account: This account often serves as a hybrid between checking and savings, sometimes offering an ATM card and/or check-writing privileges. They may also place limits on the number of monthly transactions.
  • Children’s Savings Account: Designed specifically for minors, children's savings accounts may include features such as low or no account balance requirements, low or no fees, parental controls, and financial education.

How to Open a Savings Account

While the specifics may vary slightly from one financial institution to the next, generally, you can expect to follow these steps.

1. Choose a Bank or Credit Union

It’s helpful to begin the process by comparing several banks or credit unions and choosing the one that is most likely to fit your needs. As you evaluate your options, consider factors such as whether there are nearby branch locations, the size of the ATM network, and the types of savings accounts offered.

2. Compare Your Account Options

Once you’ve selected a financial institution, consider which type of savings account to open. Be sure to review the account fees, minimum balance requirements, withdrawal limits, and other important account features before making a decision.

3. Gather the Required Documents

To open a savings account, you’ll need to provide an official form of identification, verification of address, and your Social Security number. Gathering these items ahead of time can help streamline the application process.

4. Complete Your Application

To avoid processing delays, be sure to complete the application thoroughly and accurately. While many institutions allow you to open an account online, you may need to visit a physical branch to complete your application. 

5. Fund Your Account

Once the account is opened, you’re ready to make the first deposit. Some savings accounts require an initial deposit at the time the account is established. Others may not have a minimum opening balance. 

You can deposit funds by writing a check, transferring money from a linked account, or depositing cash at a local branch or in-network ATM. You may also consider setting up automatic deposits to ensure consistent progress toward any savings goals.

Explore Your Savings Options at PNC Bank

A savings account offers a place to deposit cash while earning interest over time. The flexibility and easy access to funds make savings accounts appropriate for emergency funds, short-term goals, and longer-term savings.

Whether looking for a standard savings account, a money market account, or want to open a savings account for a child, PNC Bank has a solution designed to meet your needs. Start exploring your savings options today.

Frequently Asked Questions

How much should you keep in a savings account?

When using your savings account as an emergency fund, experts generally recommend keeping a balance equal to three to six months' worth of essential living expenses. Tracking household spending on housing, food, transportation, utilities, insurance, minimum debt payments, childcare, and other basic needs can help determine your ideal emergency fund balance. 

Ultimately, deciding how much to keep in a savings account depends on your income and financial goals. However, if you’re just getting started, keep in mind that regularly setting aside even small amounts will allow you to take advantage of compound interest over the years.

Once you accumulate savings equal to significantly more than six months' worth of expenses, consider shifting additional savings to other investment vehicles that offer potentially higher yields. Depending on your financial situation, options may include certificates of deposit (CDs), a high-yield savings or money market, stocks, bonds, or mutual funds. 

How old do you have to be to open a savings account?

While the minimum age to open a savings account on your own can vary depending on state law and bank policy, generally, it's 18 years of age. However, many financial institutions allow parents to open savings accounts for children at any age. Opening a savings account for a minor can help teach children the value of saving money and give them a solid foundation for the future. 

Can you lose money in a savings account?

Savings accounts earn steady, modest income over time. Unlike investments such as stocks and bonds, savings account balances do not fluctuate due to market conditions. Deposits are also insured up to maximum limits, offering protection in the unlikely event of a bank failure. However, if inflation rates are higher than the account's interest rate, the funds can lose purchasing power over time. Also, if you do not maintain the account's minimum balance, fees can lower your account balance.

How do I choose the right type of savings account for my needs?

When choosing a savings account, consider how much you plan to put away and for how long. Compare interest rates, fees, and minimum balance requirements for each account option. Also, consider convenience factors such as ATM access, mobile account management, and the ability to link other accounts. If you’re a student or senior or opening an account for a child, you may also have access to accounts specifically designed for your needs. They may have lower fees, more lenient requirements, and other unique account features.