What is Savings Account?, How Does It Work?

What is Savings
Account?

It is an account that is
opened by banks and financial institutions to keep people's money safe. When
you deposit money into a savings account, the bank pays you interest on the
balance. The interest rate varies depending on the bank and the type of account,
but it is typically higher than the interest rate on a 'checking(current) account'.

Savings accounts are
designed to help you save money over time. Unlike a checking account, which is
used for everyday expenses and transactions, a savings account is used to set
aside money for future goals or unexpected expenses.

 

How Does a Savings
Account Work?

The limit for depositing
a certain amount to open a savings account varies from financial institution to
another institution. This is called the minimum balance. Some banks require a
higher minimum balance than others, so be sure to check the requirements before
opening an account.

Once you have deposited
money into your savings account, you can make additional deposits at any time.
You can also withdraw money from your account, but there may be limits on how
often you can do this without incurring a fee.

Interest on a savings
account is typically calculated daily and paid out monthly. The interest rate
is usually expressed as an annual percentage yield (APY). For example, if the
interest rate on your savings account is 1%, and you have $1,000 in the
account, you will earn $10 in interest over the course of a year.

 

Pros(Benefits) of Savings Accounts

A savings account is such
an account, when you deposit money in it, your money is safe in the bank as
well as interest is also available on it. If you're not already using one, you
should consider opening a savings account for a number of reasons. 

• Keep your money safe:
  One of the primary benefits of a savings account is that it keeps your money
  safe. Unlike keeping your money in a piggy bank or under your mattress, your
  money is protected by the bank, and FDIC insurance (in the US) ensures that
  your money is safe up to a certain amount in the unlikely event that your bank
  fails.
• Easy access to funds:
  Most savings accounts allow you to access your money whenever you need
  it. You can transfer money online or withdraw money from ATMs. If you
  face any financial crisis, you can withdraw money from the account and use it.
  Like medical bills etc.
• Earn interest: The money
  you deposit in the savings account grows with the passage of time i.e. the bank
  pays a certain amount of interest on the amount deposited in the savings
  account This can be a great way to build up your savings without even noticing.
  The interest rate is usually low, but it's better than no interest at all.
• Start saving early:
  Savings accounts are a great way to start saving early, which can help you meet
  your financial goals. By taking advantage of compound interest, you can multiply
  your money very quickly. That is, in compound interest, along with the
  deposited amount, interest is also received on the interest.
• No minimum deposit: Most
  savings accounts don't require a minimum deposit, which means you can start
  saving with as little as $5. This makes it accessible to people with any income
  level, and you can increase the amount you save over time as your financial
  situation improves.
• Easy Access to Funds: Although savings accounts are designed to help you save money over time, you can still access your funds when you need them. This makes a savings account a good option for emergency funds.
• FDIC Insurance: Currently, savings accounts at most banks are FDIC-insured, meaning customer deposits are protected by up to $250,000 per depositor per insured bank. This provides peace of mind knowing that your money is safe.
• Goal Setting: Having a savings account can help you set and achieve financial goals. Whether you are saving for a down payment on a home, a new car, or a vacation, a savings account can help you get there.

Cons of Saving Accounts

Saving accounts have their downsides, which are the following:

• Low-interest rates: One of the disadvantages
  of depositing money in a savings account is that the rate of interest earned on
  the money is very low. Most saving accounts provide interest rates that are
  lower than inflation rates, which means that the real value of your money is
  decreasing over time. While saving accounts are a safe place to keep your
  money, you may be losing out on potential earnings.
• Fees: Another disadvantage of
  saving accounts is the fees that come with them. One of the disadvantages of
  savings account is that the bank charges fees for keeping money in the account,
  doing online transactions and using debit cards, etc. Bank can deduct this fee
  from the amount deposited in your savings account
• Limited access to funds: Saving accounts have
  limits on how often you can withdraw money. Some banks give their customers the
  opportunity to withdraw only a fixed amount per month without any charges as
  per their rules. This can be a problem if you need quick access to your money in
  case of an emergency.
• Inflation risk: Saving accounts are not
  immune to inflation, which means that the real value of your money may decrease
  over time. As mentioned earlier, the interest rates on saving accounts are
  often lower than inflation rates, so you may be losing money in the long run.
• Opportunity cost: If you deposit all your
  money in a savings account only and at the same time a plan comes in some other
  financial institution that gives better interest than your bank, then you
  cannot take advantage of it. While saving accounts are a safe option, they
  may not be the best option if you are looking to grow your wealth over time.

 

How to Maximize Earnings
From a Savings Account?

If you're looking to
earn more from your savings account, there are several strategies you can use
to maximize your earnings. Here are some simple tips to help you get the most
out of your savings account.

• Look for High-Yield
  Savings Accounts: The interest rates on
  savings accounts can vary widely. Some accounts offer a measly 0.01% APY
  (Annual Percentage Yield), while others may offer up to 2% APY or more. Look
  for savings accounts that offer higher APYs to maximize your earnings.
• Keep a High Balance: Most banks
  deposit money by changing the interest rate only on the balance deposited in
  the savings account. Generally, the higher your balance, the higher your
  interest rate. Keeping a high balance in your savings account can help you earn
  more interest and maximize your earnings.
• Compare Fees: Some banks charge maintenance, transaction, and monthly statement fees for money in a savings
  account. And they can deduct this fee from the amount deposited by you. Be
  sure to compare fees across different savings accounts and choose an account
  with minimal fees.
• Take Advantage of
  Promotional Offers: Some banks offer
  promotional offers to new customers, such as sign-up bonuses or higher interest
  rates for a limited time. Take advantage of these offers to earn more from your
  savings account.
• Automate Your Savings: Automating your savings
  can help you consistently contribute to your savings account and earn more
  interest over time. You can set up automatic transfers from your checking
  account to your savings account each month, so you never forget to save.
• Consider a CD
  (Certificate of Deposit): These are savings
  accounts that offer a fixed rate of interest for about six or twelve
  months. CDs typically offer higher interest rates than traditional savings
  accounts, but your money is locked up for the duration of the term. If you
  don't need immediate access to your funds, consider opening a CD to earn more
  interest.

 

How to Open a Savings
Account?

Opening a savings
account is a great first step toward managing your finances and securing your
future. Here are some steps for opening it :

Step 1- Choose a bank: You should
make sure that which bank is the most reliable and what interest rate it offers
on the frozen money. When selecting a financial institution, consider factors
such as interest rates, fees, account requirements, and location. 

Step 2- Gather required
documents: Before you can open a
savings account, you'll need to provide some documentation. You can
provide a government-issued passport, driver's license, proof of address, bills
or lease agreement, etc.

Step 3- Fill out an
application: Once you've selected a
bank or credit union and gathered your required documents, it's time to fill
out an application. You can usually do this online or in person at a branch.
Your name, mobile number, address, occupation, etc. are mandatory for opening
a savings account.

Step 4- Fund your
account: To open a savings
account, you'll need to make an initial deposit. This can usually be done
through a transfer from another account or by depositing cash or a check at a
branch. The amount required to open a savings account varies by institution, so
be sure to check with your chosen bank or credit union.

Step 5- Review account
details: Before finalizing your
savings account application, review the details of your account. You
should first understand what are the charges, interest rate, and minimum balance
associated with the account. If you have any questions or concerns, don't
hesitate to ask your bank or credit union representative.

Step 6- Sign and submit: Once you've reviewed and
confirmed the details of your savings account, it's time to sign and submit
your application. If you're applying in person, you may be given a debit card
and other account information on the spot. If you're applying online, you'll
typically receive a confirmation email with the next steps.

 

How Much to Keep in Your
Savings Account?

How much money you
should keep in your savings account depends on several factors.

Everyone should keep at
least six months' worth of money in their savings account. This includes your
rent/mortgage payments, food, utilities, transportation, and any other
necessary expenses.

Having an emergency fund
is essential because unexpected events can happen at any time. For example, if
you were to lose your job or have a medical emergency, having an emergency fund
could help you cover your expenses until you find another job or recover from
your illness.

How to close a
Savings Account?

Closing a savings
account is a simple process, but it's important to understand the steps
involved and the potential consequences before you proceed.

Step 1- Review your
account terms and fees: Before you close your
savings account, take a few minutes to review your account terms and fees. Make
sure you understand any penalties or fees associated with closing the account,
such as early closure fees or minimum balance requirements. You should also
check whether there are any outstanding transactions or fees that need to be
cleared before closing the account.

Step 2- Withdraw your
funds: Next, withdraw all the
funds from your savings account. You can do this by visiting your bank branch,
using an ATM, or transferring the funds to another account. If you have any
automatic payments or deposits set up, make sure to update them with your new
account information before closing the account.

Step 3- Contact your
bank: Once you have withdrawn
all the funds from your savings account, it's time to contact your bank to
request the account closure. You can do this by visiting the bank in person,
calling the customer service number, or sending an email or letter. Make sure
to provide your account number and any other relevant information to help the
bank identify your account.

Step 4- Confirm the
account closure: After you have requested
the account closure, your bank will typically send you a confirmation letter or
email within a few days. This will check whether there are any outstanding
fees or payments etc.

Tips for closing a
savings account

Here are a few tips to
help make the process of closing a savings account as smooth as possible:

 

• Plan ahead: Make sure to
  review your account terms and fees well in advance of closing the account to
  avoid any surprises.
• Double-check your
  balance: Make sure to withdraw all the funds from your account before closing
  it to avoid any additional fees or penalties.
• Follow up: If you
  haven't received a confirmation of your account closure within a few days,
  follow up with your bank to ensure that the process is completed.