What is a savings account, and how does it work?
One of the foundations of healthy finances is a savings habit. Setting aside money regularly can help you reach your financial goals and prepare for emergencies, reducing the likelihood of incurring debt.
Choosing where to keep that cash is an important step. A savings account provides a safe place to store your money while also earning interest.
Key Points
- Banks and credit unions offer savings accounts that allow you to earn interest while keeping your money safe.
- Financial technology companies (fintechs) also offer savings products that work similarly and may provide comparable protections.
- Savings accounts can be used for goals such as planning for large purchases or building an emergency fund.
What is a savings account?
Savings accounts are offered by banks and credit unions (although credit unions often call them share accounts) as a place to keep your cash. You deposit your money into a savings account, and the financial institution pays you a yield.
A key benefit of a savings account is compound interest. You earn interest not only on your original balance, but also on the interest that’s been added over time, helping your savings grow faster.
The federal government insures savings deposits, so your money is safe even if the bank or credit union fails. Accounts at banks are insured by the Federal Deposit Insurance Corporation (FDIC) and at credit unions by the National Credit Union Administration (NCUA), up to $250,000 for each account holder at each bank or credit union.
Savings account yields—expressed as an annual percentage yield (APY)—are generally low. In late 2025, the average savings account earned about 0.4% APY, while high-yield savings accounts paid significantly more, about 4% APY.
Traditional vs. online savings accounts
Brick-and-mortar banks and credit unions often offer lower yields than online banks because they have higher operating costs. Still, many traditional institutions compete more aggressively with online-only banks by offering higher-yield options, streamlined mobile apps, and easy online account access. If you prefer banking in person but want a better rate, it’s worth comparing what your local branch offers with what’s available online.
Online-only banks and credit unions don’t maintain branches, which helps keep expenses low. They often pass those savings along through higher rates and fewer fees, although their range of products tends to be limited to everyday banking and savings.
Savings accounts for minors
A youth savings account can help kids learn to save and build good money habits early. You can open one as a joint account in both your names; in most states, a parent or guardian must be listed until the child turns 18. The age at which minors can open an account themselves varies by state and by financial institution.
Financial technology companies (fintechs) also offer savings products that operate entirely online. These companies, often called neobanks, usually partner with one or more FDIC-insured banks to hold customer deposits. Some advertise very competitive yields through cash management accounts. But because fintechs themselves aren’t banks, your money is technically insured through their partner banks, not the fintech. That arrangement can add an extra layer of complexity if the fintech fails or changes partners.
Why a savings account is worth having
Opening a savings account and regularly contributing to it provides several benefits:
- Dedicated place for your money. Keeping some of your money separate from your everyday spending account can help you track progress and earmark money for financial goals. It separates it from your checking account, where you might spend it.
- Earn a better yield. Although some checking accounts pay interest, the rates are generally much lower than what you receive with a savings account. If you’re building an emergency fund or saving for a major purchase, you can get an extra boost from the yield your money earns.
- Liquid funds. You can access your savings account at any time, whether through transfers, withdrawals, or an ATM. Some financial institutions limit how many withdrawals you can make each month, although some banks, credit unions, and neobanks place no limit on transfers and withdrawals.
- Link to a checking account. It’s easy to set up automatic transfers between your checking and savings accounts, plus use your savings account as a linked backup against overdrafts in your checking account.
- Safe place to store money. As long as your financial institution participates in a government-backed insurance program, your deposits are protected up to $250,000 should your bank or credit union fail.
How to choose the best savings account for your goals
As you compare savings accounts, consider these factors:
- Yield. Yields fluctuate with market conditions, and the rate you receive when you open your account might not be permanent. If you start with a higher yield, you’ll get more bang for your buck even if rates fall later.
- Fees. Monthly maintenance fees are common, although many banks and credit unions waive them if you meet certain requirements, such as maintaining a minimum balance or setting up automatic transfers. Avoid banks or credit unions that charge a fee for exceeding a set number of withdrawals each month if you expect to make numerous transactions.
- Account minimums. Some financial institutions require a minimum opening deposit or balance to earn the highest yield. Review the terms carefully and choose an account that fits your budget.
- Features and perks. Look for tools that make saving easier, like subaccounts for different goals or roundups that add to your savings when you spend. Choose the options that fit how you like to save.
- Government-backed insurance. Choose an institution insured by the FDIC or the NCUA.
How to open a savings account
Credit checks and savings accounts
Most banks and credit unions don’t check your credit when you open a savings account. Some institutions may review your banking history through a reporting service, such as ChexSystems, but the inquiry doesn’t affect your credit score.
A savings account can be opened at a traditional bank or credit union in person at a branch or through its mobile app or website. Online-only banks and neobanks operate entirely online, so you’d open your account through their sites or apps.
Compare several savings accounts to find one that fits your needs, and decide whether you want to open it online or in person. Most financial institutions require basic information to open an account, including your name, address, phone number, Social Security number, and a state-issued photo ID.
If you’re opening an account in person, you’ll need to bring cash or a check for your first deposit. When opening an online account, the routing and account numbers from an existing bank account are usually required to fund the new account through an automated clearinghouse (ACH) transfer.
The bottom line
Keeping money in a savings account is a smart way to prepare for emergencies and save for short- and medium-term goals. Experts suggest keeping three to six months’ worth of expenses in an emergency fund, which can be a good use for a high-yield savings account. You can also open other savings accounts or use subaccounts to save for specific goals, such as a home down payment, vacation, or large purchase.
With planning and consistency, a savings account helps you build healthy money habits and avoid going into debt to finance a big purchase or afford unexpected expenses.
References
- [PDF] How to Open a Checking or Savings Account at an FDIC-Insured Bank | fdic.gov
- How Savings Accounts Help You | mycreditunion.gov
- Banking with Third-Party Apps | fdic.gov