Saving accounts (1)

It is a bank account that helps a person to save money for short-term goals and earn interest on the deposit . One can set up this account at any retail bank or financial institution . Its reliability and safety makes it beneficial option to deposit cash for short term needs. It helps in growing money as bank pays interest on the deposit. Saving account is easily accessible in emergency situations.

Need of saving accounts

There are various reasons to save. Saving accounts are great for building emergency funds, savings for vacation or buying a new car. Globally it is also known as check-in accounts. As name suggests, it is a parking investment strategy. Unlike several checking accounts, savings accounts usually earn interest. It pauses one’s habit of withdrawing money, kept for a specific goal or emergency conditions. Saving accounts in the bank with strong APYs, help one’s money to grow. Lending money aids the bank in offering loans to customers, and in return, bank pays interest as a reward to the account holder.

Difference between checking and saving accounts

Checking accounts or transaction accounts are designed for the person with daily money needs. A person can withdraw money without any time limitations. In checking accounts, funds are assessed by using checks, ATM, debit card, and online bill pay.

On the other hand saving accounts are designed to park money. There are no time limitations on deposit in savings accounts, whereas there are withdrawal limitations based on government regulations and banking account increment. Limitations are imposed on electronic withdrawal, bank withdrawal and money transfer to another account. If the number of withdrawals exceeds the indicated limitations, then bank charges a penalty and the account could be at the risk of being closed.

Checking accounts are great for paying bills, for fuels, buying grocery, eBay and PayPal procedures. Whereas saving accounts are good for building emergency funds, savings for buying a new house or for any other short-term goals.

Saving account is the one that can be set up online. Unlike traditional brick and mortar banks, online banking does not require any maintenance charges and as a result offers higher interest rates.

How saving account functions

Saving accounts are a major source of funds that banks or other financial institutions lend to others. Due to this reason, saving account is found in almost every bank or credit union.

Options for saving accounts

  1. Regular or traditional saving accounts

It is good for those, who want to save money for long or short-term and are not interested in getting the good interest rates.

  1. Money market accounts

These accounts have combined features of checking account and regular saving account . It is good Choice for those people who want to grow their savings while having daily access to their money through ATM or debit cards.

  1. Certificate of deposit account

These are good for the people who want to have competitive rates without any need of immediate access to their savings.

  1. Cash management account

It is good for the people who want to make cash available to invest in their retirement account or brokerage.

  1. Specialty saving accounts

It is a good choice for those who want accounts, designed for specific saving goals. examples include

  • Custodial savings account
  • Student savings accounts
  • Home down payment savings accounts
  • Kids savings accounts
  • Health savings accounts

 Interest rate

The interest rate on deposits generally varies. Some Promotional savings offer fixed rate until a certain time. On contrary to this, some credit unions and banks can generally lower or raise interest rates at anytime. Alterations in the federal funds rate can also stimulate the banks to regulate their deposit rates. Some banks offer special high-yielding saving accounts. The interest earned through a saving account is a taxable amount. When an account holder earns the interest more than  $10 then the bank sends 1099-INT form at tax time. (2)The tax an account holder pays, depends upon the marginal tax rate. Some accounts require minimum amount to avoid monthly service charges or earn maximum interest rate.

Criteria to choose saving account

Some banks require minimum balance to offer highest interest rates while other banks do not require any balance to provide interest rate. So it is important to understand the instructions before setting up account to avoid dilution of earning with fees.

Pros

  1. It is easy and fast to set up and to transfer money
  2. Can be easily linked to primary checking accounts
  3. Prevention of money loss up to a limit insured by federal in case of bank failure.

Cons

  1. One can earn more with Treasury bills, deposit certificates and investments
  2. limited number of withdrawals
  3. Saving accounts liquidity is a downside as well, as availability of funds may tempt the account holder to spend more than to save.
  4. It is a poor choice for those who make several transactions a day.

High-yielding saving accounts

It is one of the types of saving accounts that increases earning several times than a conventional saving account. It typically pays 20 to 25 times higher rate than traditional saving accounts. (3) For instance, a person is depositing $5000 in saving account, then according to national APY , let say 0.10%, he will earn just $5. If he instead deposits same amount in high-yielding account with APY of 2%, he would earn $100.

Usually people set up saving account in the same financial institution where they have their primary checking account . It makes for them easier and quick to move money between two. But it is also possible to set up electronic transfer of money between checking and saving accounts even if they are held in two different banks.

Like traditional saving accounts federal insurance is provided by

  • FDIC (Federal Deposit Insurance Corporation) in case of bank failure
  • NCUA ( National Credit Union Association) against credit union failures.

No monthly deposits

Some banks or financial institutions do not require any minimum deposit to set up an account or monthly fees to keep that account running. No monthly fee prevents the dilution of one’s money with charges. Some of the banks that do not require monthly fee or no minimum deposit are:

  • ALLY bank
  • Marcus bank
  • Synchrony bank
  • AMEX bank
  • Barclays bank

References

  1. https://www.investopedia.com/terms/s/savingsaccount.asp
  2. Internal Revenue Service. “About Form 1099-INT, Interest Income.”
  3. https://www.fdic.gov/regulations/resources/rates/