Opening a savings account is a relatively simple process. You can do so online or in person if the financial institution has physical branches. Read on for more details about savings accounts, key benefits they offer and how to move forward with the application process to open a new account.
Why Open a Savings Account
In a nutshell, a savings account provides a safe haven for your hard-earned money. You can also watch it grow effortlessly, as most earn an annual percentage yield (APY).
The Benefits of a Savings Accounts
Here are some of the key perks of opening a savings account:
- Interest earnings: You can earn interest on your deposits, allowing your money to grow over time without extra effort.
- Annual percentage yield (APY): You will benefit from the annual percentage yield (APY), which shows the real rate of return on your savings, considering compounding interest.
- Security: Your savings are protected up to the insured limit by the Federal Deposit Insurance Corporation (FDIC) if your bank is a member, providing you with security.
- Liquidity: You can easily access your money when needed, although certain withdrawals might have limits.
- Goal-setting: You can set aside money for specific goals like buying a house, vacation, or emergencies.
- Progress tracking: Having separate funds makes it easier to track your progress.
- Convenient features: You can utilize features like online banking and mobile apps to check your balance, transfer funds, and monitor your account from anywhere.
- Risk-free growth: Savings accounts offer a risk-free way to grow your money, as your deposits won’t lose value, unlike stocks or bonds.
- Banking relationship: Having a savings account can help you build a relationship with your bank, potentially leading to better rates on loans and other financial products.
Different Types of Savings Accounts
Before applying for a savings account, research your options to decide which option is best:
- Regular savings accounts: These accounts are a popular option, as they offer a safe way to store your cash and access it as needed. You’ll also earn a nominal return on your money.
- High-yield savings accounts: These accounts are a step up from regular savings accounts. They come with higher APYs, often in exchange for a monthly maintenance fee that could be eligible for a waiver if certain conditions are met. They may also require a minimum opening deposit.
- Money market accounts: These accounts merge the features of both savings and checking accounts. You typically get check-writing abilities and debit card access and earn higher returns than traditional savings accounts offer. However, it’s relatively common for financial institutions to impose opening deposits and minimum balance requirements for money market accounts.
- Certificates of deposit (CDs): These accounts are a safe investment vehicle. You can lock your money away for a set period – from a few months to several years – in exchange for a guaranteed return. If you need to withdraw early, you’ll likely incur a monetary penalty.
- Student savings accounts: These accounts are exclusively for students and generally skip the monthly fees and minimum balance requirements. Student savings accounts also earn a small return with most financial institutions.
- Joint savings accounts: These accounts are designed for couples or relatives who want to manage savings jointly. Each account holder has equal access to the funds.
- Specialty savings accounts: These accounts are offered by some financial institutions to help consumers meet specific goals. You could receive special incentives to achieve your savings goals within a specified time frame.
Preparing to Open a Savings Account
Before applying for a savings account, there are a few actions you can take to help simplify the process.
Gathering Necessary Documents
You’ll need to provide the following when you apply for a new savings account:
- Proof of identification (i.e., driver’s license, state-issued identification card, passport)
- Social Security number (or Tax ID for business accounts)
- Proof of address that matches the address on your ID (i.e., recent utility bill, mortgage statement or lease agreement)
Having these documents handy helps prevent delays in the processing of your application for a new savings account.
Understanding the Requirements
Banks and credit unions often have requirements to open a savings account. More specifically, you may be required to make a minimum opening deposit and maintain a certain balance to steer clear of monthly maintenance fees.
Credit Score Considerations
Some financial institutions perform credit checks when you apply for a new account. You likely won’t need a perfect credit score to move forward, but a low credit score could make it more challenging to open a savings account at some banks and credit unions.
Step-by-Step Guide to Opening a Savings Account
It’s relatively easy to open a savings account. Here’s a step-by-step breakdown of how to move forward.
Choosing Your Preferred Bank or Financial Institution
The first step is to choose a bank or credit union to stow away your hard-earned money. There’s no shortage of options, so you want to compare structures, interest rates, fees, customer service and accessibility to find the right fit
Traditional Banks vs. Online Banks
Traditional banks offer a more personalized experience, as most have physical branches you can visit to speak to a banker in person. They also generally feature a wide range of banking products and services, including checking and savings accounts, credit cards, loans and investment services.
Online banks lack physical branches but often offer higher interest rates on checking and savings accounts since they have fewer overhead costs. Some also have credit and loan products to choose from.
Comparing Interest Rates and Fees
You’ll likely earn a return on your savings, expressed as the annual percentage yield (APY). The exact amount depends on the financial institution you select, and some savings accounts have more competitive APYs than others.
Monthly maintenance fees can be assessed on the savings account if you fail to maintain a certain minimum daily or monthly balance. Other fees may also apply, so check with the bank or credit union to confirm before moving forward.
Evaluating Customer Service and Accessibility
You want a bank that offers exceptional customer service to ensure your banking experience is enjoyable. Take a look at online reviews from past and current account holders to get a feel of what to expect.
Accessibility is another crucial factor to consider. Ideally, you want a bank or credit union with branch access if you prefer face-to-face interaction with a banker. Branches and ATMs should also be within close proximity. If you choose to go with an online bank, 24/7 customer support via phone or chat, along with convenient ATM access and cross-account transfers, is also ideal.
Completing the Application Process
Once you’ve selected a bank or credit union, you’ll need to apply in person or online for a savings account.
In-Person Application
If you choose to apply online, be sure to bring the identifying documents you need, along with proof of address and a cash or check for the opening deposit (if applicable).
Online Application
Applying online is simple and convenient. Prepare to complete an online form and schedule a deposit for at least the minimum amount (if applicable).
Initial Deposit and Funding
Again, many savings accounts require a minimum opening deposit before the account is active. However, some do not have this requirement, so it’s best to inquire before applying.
Setting Up Account Features
To make the most of your savings account, you need to set up a few essential features.
Automated Transfers
You can schedule automatic deposits into your savings account to help you meet your savings goals faster. Doing so also enables you to avoid the temptation to spend money that could be saved, and you can adjust or cancel scheduled transfers at any time.
Account Alerts
There’s also the option to opt-in to real-time alerts. Account alerts are sent via text message or email when activity occurs in your account. They provide an added layer of security so you can stay on top of your finances.
Managing Your Savings Account
Once your savings account is open, these tips will help you manage it effectively.
Monitoring Your Balance
Be sure to monitor your balance through the online dashboard or mobile app. You can also sign up to receive mobile alerts. That way, if you spot any errors or unauthorized activity, you can contact your financial institution to have them resolved quickly.
Understanding Interest and Compound Growth
As previously mentioned, savings accounts typically come with an APY, which is the amount of interest the financial institution pays on your money. Simple interest is calculated on the principal, and compound interest is calculated on both the principal and any previously earned interest.
Avoiding Fees
Again, watch out for fees, as they can eat into your savings balance. Look for banks and credit unions offering fee-free savings accounts. This is relatively common with online-only banks.
Common FAQs About Savings Accounts
Yes, you can open several savings accounts with the same financial institution or with more than one bank or credit union.
Withdrawals are typically limited to six per month. Transaction limits may also apply, and exceeding them could mean costly fees per occurrence.
Deposits of up to $250,000 held at Federal Deposit Insurance Corporation (FDIC) backed banks or credit unions insured by the National Credit Union Administration (NCUA) are protected if the financial institution fails.
Interest earned on savings accounts is considered taxable income. Banks usually provide you with a Form 1099-INT if your interest income is $10 or more in a year.
You must report this income on your tax return. For most people, this interest is added to their ordinary income and taxed at their regular rate.
