Opening a savings account is one of the smartest financial decisions you can make. Of course, you have to consistently save for it to be truly effective.

But, there are plenty of options, information, and some simple steps that goes into opening an account and choosing the right one.

This beginner’s guide to savings accounts will help you on your journey to financial wisdom by answering questions like:

What is a savings account? Should I put all my money in my savings? What are the best types of accounts for saving money? Is an online savings account good?

Feel free to use the table of contents below to jump to your desired section as you may only need some specific tips.

What Is A Savings Account?

A savings account is a financial account that you periodically deposit money into with the purpose of saving that money to use down the road.

You are limited to the amount of times you can withdraw money from your savings account in a month, as the purpose of these accounts is to save.

Think of this account as your emergency fund, a way to save up for an unexpected life event, rainy day, or a big expenditure like putting a down payment on a home. Every wise investor has money set aside in a savings account that can be used to make a purchase quickly if need be.

Savings accounts also enable you to earn a guaranteed interest rate while giving you the flexibility to use that money as savings accounts are relatively liquid.

Fun financial jargon: liquidity, or being liquid, is the ability to access your money immediately rather than money tied up in an asset that you would have to sell such as a stock or house.

How do I open a savings account? (4 simple steps)

Decide if you want a savings account with your bank directly tied to your checking account or a savings account with a different institution that may pay a higher interest rate. Search online for savings accounts and the interest rates those banks provide. Credit unions or online-only banks can be great options too. Confirm how much the initial deposit is for that savings account by looking at the bank’s website. Some banks require an initial deposit and some do not. Also look for what the minimum balance is as well. If you choose your bank: go there during business hours with the initial deposit and your identification. If you choose a separate online institution: follow the guides on their website and/or contact their customer service. Many banks allow you to open an account from their website.

How Do I Put Money Into A Savings Account?

Simply transfer money from your checking account into your savings account. Transferring the money depends on the relationship between your checking and savings account.

If you opened a savings while starting your checking account then you should be able to transfer money between the two accounts online or on your phone via the bank’s app. Here you will see your funds transfer immediately.

If you opened a savings with a different bank than your checking account, you will most likely go to the account’s website or app to initiate a transfer or mobile deposit a check from your checking account. Here it may take a business day or two for the funds to transfer.

Should I Get A Savings Account?

Yes, you should!

It is always a good idea to take a portion of your money and transfer it from your checking account to your savings. Typically, this is part of a process known as “paying yourself first.”

This practice will help you have savings to use for a rainy day, retirement, or a big savings goal such as a downpayment for a home.

Also you will earn interest on the money in your savings account.

This is a free way to make a little extra money on the cash that you have stashed away for another day. The interest can also “compound” over time.

Should I Put All of My Money Into A Savings Account?

No! Absolutely not.

The key to investing is diversification, the one thing Jordan Belfort had right in the Wolf of Wall Street.

You should put a portion of your earnings into your savings consistently, some into other investment vehicles, and the rest of your earnings should stay in your checking account to pay your bills with a little extra buffer in case you need some quick cash.

Your personal savings is a great place to store a percentage of your cash. However, to build wealth you want to have your money diversified.

How Much Money Should I Save?

That is the question of the ages! The correct (and unfortunately vague) answer is what makes sense for you, your financial goals, and your lifestyle.

Here are the things to consider when determining how much money to save:

How much you earn Your monthly expenses How much you currently have in a savings account compared to what you are saving for Other investment opportunities

Many people aim to start with saving 10% of everything they make. However, if you look at the data, the average America for example is saving less than 5%.

As you make more money or if you see that you have money stockpiling in your checking account, consider increasing your savings rates and potentially start investing more of your income.

Then with the money you are saving think about saving for a rainy day fund, a down payment for a home, and other big purchases that you might make one day such as paying for a wedding.

How much does it cost you to live for three months? That’s how much your rainy day fund should be minimum.

Once you’ve accomplished saving that amount you may want to consider putting less money into a savings account and more money into other investments such as retirement accounts (outside your employers 401k), health savings accounts, college funds, or other investments.

How Is A Savings Account Different From Investing?

Savings accounts provide a guaranteed interest rate while offering you the ability to withdraw your money at a moments notice. Thus, this interest rate is typically lower than what you can earn with other investment vehicles.

You are limited to six withdrawals a month from a savings account but your money is readily available. (You can withdraw more, but your bank may penalize you).

Investing money in stocks can provide big returns. With that upside is the possibility that you can also lose a big portion of your money if you throw all your eggs into one basket.

This is why it is wise to put a portion of your money into a savings account. You will earn interest on your money, you won’t lose your money in a bad investment, and you have the flexibility to withdraw your money should you need it.

But remember: diversification. Don’t put all of your retirement money into a savings account. You will need to diversify your money in order to grow financially but for now let’s focus on the savings account.

Can I have A Savings And Not A Checking Account?

Yes and no.

Yes, you can get a savings account that is not tied to a checking account.

No, you cannot operate in life without a checking account. This makes the checking account mandatory and the savings account optional though it is highly recommended to have a savings account.

What’s the difference between these accounts?

Savings accounts and checking accounts are definitely not one in the same.

You need a checking account to pay bills and make other frequent withdrawals.

There is a limit as to the number of times you can withdraw money from your savings account in a month.

This is because savings accounts are meant to save money with the expectation of infrequently withdrawing for emergencies or larger purchases, like a home.

You 100% need a checking account. You don’t necessarily need a savings, though it is highly recommended.

Learn more about checking accounts here.

What Types of Savings Accounts Are the Best?

The ones that pay the highest interest rates, are FDIC insured (your money is protected up to $250,000 if the bank fails), and has no maintenance fees.

Most savings accounts tied to your checking account from the same bank, will have lower interest rates than others you can find.

Honestly depending on your needs it might make sense for you to have two savings accounts. Why?

If you need quicker access to cash for a rainy day then a savings account directly connected to your checking account will allow you to transfer the money instantly.

A savings account at another institution will most likely take a business day or two to deposit into your checking account should you need it.

Savings interest rates with a traditional brick and mortar banks are pretty low ranging anywhere from 0.01% to 0.08%.

Pro: instant transfer of funds between checking and savings.

Con: lower interest rates paid to you.

The interest rates with online savings accounts such as CIT Bank or Popular Direct can range from 2% to 2.5%.

Pro: higher interest rates paid to you.

Cons: longer transfer time of funds between checking & savings and also some of these accounts require a higher initial deposit to open a savings account.

That’s a huge difference! Let’s look at the highest rates from each: 0.08% and 2.5%. Assuming you have $1,000.00 to start in 1 year, you would have $1,000.80 and $1,025.29 respectively.

As you can see, earning $0.80 versus $25.00 is quite the difference. Thus we recommend looking for savings accounts online to help you grow your savings.

How Much Money Do You Need To Open A Savings Account?

There are some banks that will require a set minimum balance in order to open a savings account with them. This minimum will vary for different financial institutions, where some high-yield savings require $1,000+ but others may require less that $100. Always pay attention to balances and fees before opening an account.

Is It Worth It To Open a Savings Account?

If you are looking at online banking or savings accounts purely to grow your cash, a savings account is not the best option. Rising inflation and the little amount of interest on your money does little for you. However, a savings account is primarily a place to store your money for quick access to funds. So yes, having a savings account is still worth it.

What Should I Know Before Opening A Savings Account?

The main features to know before opening a savings account with any bank:

What is the interest rate you might get on your money?

What is the minimum amount to open an account?

Is there a minimum balance to keep in the account?

Are there monthly fees? Avoid if so.

Does the bank offer FDIC protection?

Is It Safe to Open A Savings Account Online?

The banking industry has evolved and there are many online savings accounts and mobile banking options today. These are very safe options as the legit online banks offer high-level encryption and security features to safeguard your money. Plus, they will be FDIC ensured which offers more protection if the bank were to fail (although very unlikely).