Savings accounts are a great option for keeping some cash on hand for easy access, but many people treat their savings too much like an investment or a checking account. Here are the important things to know about savings accounts, how to use them, and how to not use them.
What is a Savings Account?
A savings account is a highly liquid account used to save money for a longer period of time than checking. Savings accounts are very safe, FDIC insured investments. However, they do not pay very much interest.
You can add to your savings account as often as you like, but banks have limits on the number of times you can withdraw money from a savings account per month. They should not be used for bills or other payments.
How to Deposit Money into a Savings Account
You can add money to a savings account similarly to a checking account. You can add cash or checks by visit your bank branch or your bank’s ATM.
You can also transfer money electronically using an ACH from another institution, an online transfer from other accounts at your bank, or a wire from another institution, thought banks usually charge fees for wires.
While most people do not, you can easily add funds to your savings account from a direct deposit. If you are paid via direct deposit, and you are trying to save automatically, you can deposit a fixed amount, fixed percentage, or any amount over a fixed amount into your savings before it even hits your checking.
How to Withdraw Money from a Savings Account
Taking money out of a savings account is almost as easy as a checking account. In fact, it is pretty much the same other than paper checks, though some banks do offer check privileges for savings and money market accounts.
To summarize, you can transfer out to another account at the same bank or initiate an electronic withdrawal (ACH) to another institution.
The biggest difference is that you have a limited number of withdrawals from a savings account per month, where a checking account has unlimited withdrawals. To reward you for leaving your money in for a longer, more stable term, banks generally give higher interest rates to savings accounts.
How to Use Your Savings Account
You should use your savings account for its namesake: Saving!
I suggest adding to your savings account either every payday or once a month until you hit your savings goal. Many savvy savers use their savings account for an emergency fund, as it is accessible with no notice, provides higher interest than a checking account, and keeps the funds separate so you don’t accidently spend it.
Keeping the funds separate is a very important psychological barrier. Checking accounts should be used to pay for your life. Savings accounts should only be used rarely, and should be used for either big goals or emergencies only.
How to Not Use Your Savings Account
This may sound a bit repetitive, but only because it is important. Savings accounts should not be used for your regularly spending.
Because you are limited in the number of withdrawals per month, don’t put money in that you will need in the near future.
Also, don’t use a savings account as an investment account. For long-term investing, look to other investment vehicles and options. They will have more risk, but that comes with higher potential returns.
My Favorite Savings Accounts
Ally Bank is my favorite place for savings accounts right now. They have great rates and a reputation for top notch customer service across the board. Ally Savings works well with Ally Checking, as you can easily and instantly transfer between the two.
After Ally, my favorite place for a savings account is Capital One 360, formerly ING Direct. 360 Checking and 360 Savings work well together and offer an automatic savings plan and sub-savings accounts to help you save for special goals.
I also have a Schwab Bank savings account, as I use Schwab for my investments and want quick access to move money around between accounts.
Make Sure to Track Your Accounts
Just like with my checking accounts, I use free online programs to track all of my accounts balances and transactions in one place. They only take a few minutes to setup and refresh every time you log in.
How Do You Do Savings?
What is your strategy for savings? How do you treat your savings account? Do you have a savings goal or emergency fund? Please share your thoughts in the comments.
Image by bradleykurtz / flickr