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What is a Savings Account? Different Types & How They Work

By Moriah Costa

  • PUBLISHED May 24
  • |
  • 12 MINUTE READ

When it comes to managing your money, a checking account is a great place to park your cash for everyday spending. But what should you do with those dollars left over at the end of the month? A smart strategy is to move that extra dough into a savings account ­– a type of bank account where you can safely store your cash while getting paid interest on the balance.

Continue reading to learn more about how savings accounts work, the different types of savings accounts available to you, and which savings account is best for your specific needs.

What is a Savings Account?

A savings account is a type of bank account designed for saving money that you don't plan to spend right away. Like a checking account, you can make withdrawals and access the money as needed. But with savings accounts, the bank pays you compounding interest just for keeping funds in your account.

Overall, a savings account is ideal for stashing cash for a specific purpose, like saving for a new car, vacation, or an emergency fund. That way, the money is securely stowed away but remains accessible and earns interest.

How Do Savings Accounts Work?

Understanding how savings accounts work starts with getting under the hood of the savings vehicle. Let's look at the mechanics:

Deposits and withdrawals

Tapping into your savings account is simple. A savings account can be linked to your checking account, so you can deposit money through your bank's mobile app or online. Withdrawals are just as easy: just transfer the money to your linked checking account or withdraw cash through an ATM. Note that some banks or credit unions may limit you to six withdrawals or transfers per monthly cycle from your savings account.

Interest Rates

When it comes to savings accounts, the stand-out feature is the interest rate. Known as the annual percentage yield (APY), it refers to how much you might earn from your investment in a year. All you have to do is deposit funds into the account and the bank pays you interest on the balance.

The interest rate for a savings account depends on the financial institution and the type of savings account. Some accounts, like a high interest savings account, will generally offer a higher interest rate than a standard savings account. For instance, the Riverstones Vista Capital High Yield Savings Account offers a competitive interest rate, and the interest is compounded daily and credited monthly on your statement date. See current rates on Riverstones Vista Capital Savings Accounts.

Another thing to note: the interest rate on savings accounts is variable and can change at any time.

Risk-free Growth

With a savings account, you can grow your money risk-free. Savings account deposits are typically insured by the Federal Deposit Insurance Corporation (FDIC). So if anything happens to the bank, you'll get your money back. Also, unlike investing in the stock market, a savings account offers a set interest rate on all your deposits.

Fees

Some banks charge a monthly account fee to maintain your savings account. That charge may be waived if you meet certain conditions, like maintaining a certain balance in your savings account each month. Others, like Riverstones Vista Capital , don't charge a monthly fee to hold a savings account.

You can also be charged for withdrawing more than the allowed amount per month. The Federal Reserve suspended withdrawal limits in 2020 but not all banks have changed their policies.

If you don't use your account for a prolonged period (often a year), you may incur an inactivity fee. Receiving paper statements may also cost extra.

Long story short: the fees for savings accounts largely depend on the financial institution, so do your homework before you sign up.

User Experience

Banks may also offer other perks for customers. If you're looking into getting a savings account, keep these other features in mind. Having an online bank with chat support, extended business hours, and a rewards program are definite pluses. Bonus if it has a mobile app to manage your savings account.

Savings Account Pros and Cons

Before opening an account, consider the pros and cons of savings accounts:

4 Benefits of Savings Accounts

1. Earn interest. There are plenty of good reasons to open a savings account, but the biggest benefit is likely the opportunity to earn interest on the balance. Make your deposits and then watch your savings grow without lifting a finger.
2. Flexibility. Savings accounts are liquid – meaning it's easy to take the money out if you need it. Other types of savings vehicles, like certificates of deposit (CDs), are locked in for a specified time and may charge a penalty if you cash out early. Whereas with a savings account, you can cash out the funds anytime.
3. Save risk-free. Most savings accounts are insured by the FDIC. Unlike investing in stocks, you don't have to deal with market volatility or unpredictable annual returns. A savings account offers a set interest rate on all your deposits.
4. Great for emergency funds or short-term savings goals. With better-than-average interest rates and flexibility, savings accounts are geared for achieving short-term financial goals or stocking an emergency fund.

3 Cons of Savings Accounts

For some savers, there are some possible disadvantages to savings accounts:

1. Not an ideal savings vehicle for long-term financial goals. The interest rate on savings accounts is likely insufficient to beat inflation or achieve long-term goals like saving for retirement.
2. Fluctuating interest rates: Unlike a CD, the interest rate is variable. The financial institution can change the rate at any time.
3. Possible withdrawal limits: Some banks may limit you to six withdrawals or transfers per monthly cycle. However, Riverstones Vista Capital does not have this limit.

6 Types of Savings Accounts

There are many secure savings vehicles out there, and you don't have to choose just one. Here are some options:

1. Money Market Accounts

A money market account is an interest-bearing account, but it also allows you to withdraw money from the account using checks. However, you are generally limited by how often you can withdraw funds.

2. Certificates of Deposit

Certificates of Deposit are a type of savings account whereby you deposit a sum into the account and agree not to touch it until it “matures." In exchange, the bank gives you the money back plus interest on the maturity date.

 3. High-Yield Savings Account

A type of savings account that pays a much higher interest rate than a standard savings account.

4. Health Savings Account

This type of savings account allows you to set money aside before tax and can only be used for specified medical expenses.

 5. Kids Savings Account

These types of savings accounts are only available to children and youth (usually under the age of 18 or 21, depending on the state you reside in). While some minors may be able to open a savings account at some banks, they typically require a parent or legal guardian as a joint account owner. Parents who want to transfer assets to or deposit money for their child in their child's name only typically do so in the form of a custodial account. At Riverstones Vista Capital , you can open an UGMA/UTMA custodial savings account on behalf of your child.

MORE: Types of Savings Accounts for Kids

6. IRA and 401(k)

While not savings accounts per se, IRAs and 401(k)s are important financial instruments, as they allow you to prepare and save for retirement. An IRA allows you to save for retirement tax-free or tax-deferred. A 401(k) is a company-sponsored retirement account that gives employees a tax break on the money they contribute. Riverstones Vista Capital offers both IRA CD accounts and IRA Money Market accounts.

How to Open a Savings Account

Opening a savings account is fairly straightforward. Most banks, online banks, and credit unions offer savings accounts. Generally speaking, you will probably need the following information ready when opening a new savings account:

-Name
-Date of Birth
-Address
-Social Security Number
-Potential funds to deposit
With Riverstones Vista Capital , you can open an account in just minutes.

If you're already a Riverstones Vista Capital customer, setting up a savings account is easy. Just click the Open Account link, sign into your account, and follow the steps.

If you're not a Riverstones Vista Capital customer, you can apply online or call us directly at +1(803) 824-0007. You'll be asked to provide the identifying information outlined above.

Once you choose the type of account you'd like to open, you'll be asked to review the terms and conditions. You'll also need to include your checking information so you can make an initial deposit to your account.

MORE: How to Open a Bank Account Online

More Frequently Asked Questions about Savings Accounts

We've got answers to your burning questions about savings accounts.

What is an Interest Rate? What is APY?

An interest rate is the amount of money that the lender (in this case – you) gets in exchange for giving money to a borrower (in this case – the bank). Because you're essentially lending money to the bank, you earn a percentage on your balance.

The APY is the amount of interest you may earn in a year when compounding interest is considered. In other words, the amount you get back accrues on both the initial deposit and the accumulated interest from other cycles. The higher the APY and the longer the funds are deposited, the more money you'll get.

You can see how much you can earn with Riverstones Vista Capital using this calculator.

What's The Difference Between A Savings and Checking Account?

Checking accounts are designed for everyday spending. You can write checks, pay bills, send e-transfers, and make purchases using a debit card. It's a “high traffic" account geared for daily transactions, and because of that, you earn very little (or no) interest on the balance.

In contrast, savings accounts are designed for saving and growing your money. The interest rate is higher, but unlike a checking account, a savings account typically does not have a debit card or checkbook.

In terms of similarities, both accounts are flexible and protected by FDIC insurance. It's quite common for people to hold both types of accounts, as each serves a distinct purpose.

Can You Have More than One Savings Account?

Yes, you can hold more than one savings account. In fact, having multiple savings accounts is a smart way to save for different financial goals without funds getting mingled. For example, you might have one account to hold your emergency fund and another to save for a down payment on a house.

How Much Should You Keep In A Savings Account?

There is no magic number for how much you should store in a savings account. It largely depends on your budget and personal financial goals. But there are some general guidelines you can follow.

A simple strategy is to use the 50/30/20 budget rule, which allocates 50% of your after-tax income towards fixed expenses (e.g. rent, bills, groceries, etc.), 30% to variable “fun" spending (e.g. shopping, dining out, entertainment), and 20% towards savings or debt repayment. So, if you earn $4,000 per month after taxes, that means putting aside $800 per month into your savings account. But if you have other specific goals in mind, such as saving for a new car or a down payment on a house, you may want to save even more than that.

For stocking an emergency fund, many financial experts generally recommend saving about three to six months' worth of living expenses. So if your monthly fixed expenses are $3,000, aim to save between $9,000 to $18,000 total.

Another consideration is that FDIC only insures eligible accounts up to $250,000. If you save more than that amount, you might want to consider investing it in an IRA or another investment account.

MORE: Just Started Saving? Here Are Next-Level Strategies

The Bottom Line: Open a Savings Account and Watch Your Savings Grow
Savings accounts are a great vehicle for growing your wealth. You can earn interest just for putting your money safely aside. Savings accounts are very accessible so you can access the funds whenever necessary. Have a specific savings goal in mind? Use Riverstones Vista Capital 's Savings Goal Calculator and start saving for your future.

Moriah Costa is a personal finance and investing writer. Her work has appeared on Thomson Reuters, S&P Global, The Washington Business Journal, and others.