Savings Basics: How to Get Started with Savings Accounts

By Miranda Marquit (Staff Writer), on July 8, 2010

One of the keys to financial freedom is developing a habit of saving. It sounds really basic, but many people have trouble with this, and many just don’t know how to start. Here is an overview of how you can get started with savings accounts. The article will cover types of savings accounts, how to open one, and various alternatives that you can choose from.

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Types of Savings Accounts

There are different kinds of savings accounts. One of the main considerations is the yield you can get on your money. The bank pays you interest — expressed as annual percentage yield (APY) — since the money you deposit is used to fund loans out to others. Rates are influenced by the Fed Funds Rate, and right now, most cash products have low yields, since the Fed rate remains incredibly low. When the Fed begins raising rates, yields on savings accounts should head higher as well. Of course, the bank loans out the money at a significantly higher rate than you are earning, so it makes a profit.

The type of account you choose can influence the returns you get for your money. The main types of savings accounts are as follows:

1. Traditional Savings Account: For the most part, this is the account you will get when you go to a brick and mortar bank and ask to open a savings account. This type of account generally offers the lowest yields, less than 1% in most cases right now. However, there are rarely minimum account balance requirements, and often no fees are charged.
2. Money Market Savings: You can usually get a better rate than a traditional account if you consider a money market savings account. Unlike traditional accounts, some money market accounts will allow you to write checks from the account. However, you are likely to have a minimum balance requirement in order to avoid a fee.
3. Online Savings Accounts: Technology has made it possible for many banks to operate almost entirely online. Many of these banks offer higher yields (around 1.5% to 2% at this time). Additionally, many brick and mortar banks have online accounts that offer better yields than their more traditional offerings. It might be worth it to consider one of these from the standpoint that it might be a little more difficult to access your money, forcing you to think things through before withdrawing in what might not actually be a true emergency. Many online savings accounts may require you to transfer money to your traditional checking account before getting access to it.
4. High Yield Savings: Many online savings accounts are also high yield accounts. In order to get the best rates, you might need to have a hefty minimum deposit. There are some high yield accounts paying around 3% yields right now.

In addition to minimum requirements that some banks might have, it is also important to note that there are also rule governing how many withdrawals you can take from a savings account each month. Because it is a savings account, you might be restricted to between four and six withdrawals every month.

Opening a Savings Account

Opening a savings account is fairly straightforward in most cases. You must be 18 to open an account only in your name, and minors should have a legal guardian to be a secondary on their accounts.

You will need a form of identification, and this may include a tax identification number or Social Security Number (especially for online accounts). You will need to offer your home address and mailing address, along with your phone number. Some banks may require that you set up a checking account along with your savings account. Additionally, you might be asked questions about what you plan to do with the money — especially if it’s a significant amount — as required in some situations by the USA PATRIOT Act.

Before you open an account, you need to make sure that your financial institution of choice is FDIC insured. Also, note that, unless things change, the protected account limit goes from $250,000 back down to $100,000 on January 1, 2014. Watch how much goes into your account.

Alternatives to Savings Accounts

If you are not satisfied with the yields offered by the savings accounts, there are alternatives. You can look for a rewards checking account at a local financial institution, which can offer up to 5% yield, depending on how much you have in your account. You can also create a CD ladder to help increase your yields. Another option is some sort of money market fund or a Ginnie Mae fund. However, these funds are not FDIC insured, and there is a chance (though slim) that you could lose your money. Note that these types of alternatives to savings accounts may have limits on liquidity and charge penalties for withdrawals.

Here are some more alternative options to a savings account.

This article was featured in the Carnival of Personal Finance at Nerd Wallet.

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Miranda is a journalistically trained freelance writer and professional blogger working from home. She is a contributor for Mainstreet.com, Personal Dividends and several other sites. You can also find her at The AllBusiness Personal Finance Corner.

All posts by Miranda Marquit (Staff Writer)

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