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How do savings accounts work?

Want to save but still have access to your cash when you need it? A savings account might be right for you.

What is a savings account?

A savings account is a simple and safe way to save money. Savings accounts are liquid, which means that the money is available for quick withdraw at any time. This makes them ideal for short-term savings such as:

If you need your money right away, you can simply withdraw available funds from your account.

Are savings accounts insured?

Accounts are insured up to $250,000 per ownership category per bank (not per savings account opened). The FDIC offers insurance in many different account type/ownership categories. Based on the structure, you may be able to receive more than $250,000 i.e. adding beneficiaries.

Is savings account interest paid?

Typically, the trade-off for liquidity is a lower interest rate. While you'll earn interest on the money in your savings account, it won't be as substantial as with other investment vehicles. In other words, you're probably not going to get rich or retire off the interest you earn from a traditional savings account. But that's not the point of short-term savings or emergency funds anyway.

That's not to say that you shouldn't shop around for the best rates and savings account for yourself. Most institutions offer a range of options to be aware of when choosing your savings account, such as:

  • savings account interest rates,
  • savings account minimum balance requirements, and
  • savings account fees.

Are there savings account fees?

Savings accounts fees may include monthly service fees and transaction fees. If you're a savvy saver, avoiding these fees is possible and desirable. Regularly paying fees can eat up the interest you earn, and possibly even some of your savings.

Monthly service fees are those charged to simply have an account, but you may be able to eliminate these transaction fees by being aware of your banking habits. Many financial institutions will waive these fees if you maintain a specified minimum balance in your account, or participate in an automatic deposit program.

If your bank charges a fee for ATM withdrawals over a certain number, plan your withdrawals to stay within the limit. Also, try to avoid using out-of-network ATMs — those owned and operated by other banks — as you'll likely incur a fee from both the ATM owner and your bank. However, some banks will refund fees charged for using out of network ATMs.

Does my savings account balance make a difference?

Balance requirements are often linked to interest rates. Many banks and credit unions will pay more interest in return for having a higher minimum balance in your savings account. While this may seem reasonable, you need to be sure that you can maintain that higher balance. If you dip below the minimum amount at any point during the month, the monthly service fee may still be charged. 

Also, if you have a significant sum of money, a savings account may not be best savings strategy for you. You may want to transition some of your savings into a Certificate of Deposit (CD) or Money Market account that pays a higher interest rate and still offers the comfort of insurance. You may want to meet with a financial advisor to establish an investment plan.

As with any type of savings, your best plan of action is to deposit your money and leave it alone. After all, when interest is compounded, even a small amount of money could add up over a period of time.

The information in this article was obtained from various sources not associated with State Farm® (including State Farm Mutual Automobile Insurance Company and its subsidiaries and affiliates). While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. State Farm is not responsible for, and does not endorse or approve, either implicitly or explicitly, the content of any third party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. State Farm makes no guarantees of results from use of this information.

State Farm® and its affiliates do not provide tax, investment, or legal advice. Federal and state tax laws are subject to change. If tax, investment, or legal advice is required, please seek the services of a licensed professional.


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