What is a savings account?

A savings account is a basic type of financial product that allows you to deposit your money and typically earn a modest amount of interest. You can find savings accounts at banks and credit unions. You don’t need a large amount of money to open a savings account, and you also have easy access to your money.

Why you need a savings account

A savings account is a good place to keep money for a later date, separate from everyday spending cash, because of their safety, reliability and liquidity. These accounts are a great place for your emergency fund or savings for shorter-term goals, like a vacation or home repair.

Beyond quick access to your cash when you need it, savings accounts often offer higher interest rates than checking accounts. You might even find some savings accounts with a higher APY than money market accounts. The average APY on savings accounts is just 0.06 percent, but you can find high-yield savings accounts paying around 0.6 percent.

Finally, there are many opportunities to open a savings account with low fees. You can often find simple options to avoid pesky maintenance fees.

How does a savings account work?

You will open a savings account at a bank or credit union, either online or in person. The process is similar to opening a checking account. You will provide the institution with personal information and then deposit money into the account.

Once you’ve made a deposit, the money in your savings account will begin to earn interest. The amount you earn will depend on a few factors, including your savings account APY, the amount of money you deposit and how long you keep money in your account.

Your bank may choose to compound interest on a daily, monthly, quarterly or yearly basis. At the end of each compounding period, your accrued interest is deposited into your account. From there, your new account balance (deposits plus interest) will begin earning interest.

Your savings account APY is variable and can change at any time. You can move money out of the account whenever you want, but Regulation D limits the amount of times you can do so to six per month.

How much should you keep in your savings accounts?

The amount of money you should keep in a savings account largely depends on your goal. If you’re using it as an emergency fund, most financial advisors suggest that you keep three to six months’ worth of living expenses in your account.

If you’re saving for a specific goal — like a vacation, buying a house or purchasing a car — you would keep enough in the account to pay for that expense.

You can use a simple savings calculator to calculate your savings and see how long it might take you to save for a specific goal.

Can you lose money in a savings account?

You’ll never lose the money you have saved — up to the FDIC insurance limit of $250,000 per account owner at FDIC-insured banks. But the money in your savings account can lose purchasing power over time. For example, if someone earns 0.2 percent APY on their savings account and inflation is at a 2 percent annual rate, they’d face a 1.8 percent decline in purchasing power over a year.

According to Bankrate data, the average interest rate for savings accounts nationally is just 0.06 percent. You can open a high-yield savings account to earn a higher APY, but you’ll still be missing out on the potential investment returns offered by higher-risk investments, such as mutual funds, stocks and bonds.

Find the right balance of cash to store in your savings account. You want to keep enough on hand to deal with any emergencies. But you don’t want to overdo it and miss out on the opportunity to grow your investments over the long term.

Are online savings accounts safe?

Online savings accounts are just as safe as savings accounts at traditional institutions. As long as the institution offering a savings account is insured, your deposits are safe. Look for banks — both traditional brick-and-mortar banks and online banks — that are insured by the FDIC and credit unions insured by the National Credit Union Share Insurance Fund (NCUSIF). Both insure savings accounts up to $250,000 per depositor, per insured bank or credit union and per ownership category.

The biggest benefit of an online bank is that they typically can offer higher yields because their overhead costs are much lower than brick-and-mortar banks.