Consumers use the checking bank account to set aside money for future use. Savings accounts increase the principal held in the account with the interest it offers to the depositors. Today, all banks and many financial institutions have savings account options.
What Is A Savings Account?
A savings account, one of the primary account types known in bank systems, is the type of account where you deposit your money in the bank for a while in return for interest values. In this system, it is one of the investments that you can withdraw with the condition that you keep your money for a certain period in return for interest, and when this condition expires, if you wish, it is taken back.
A savings account is a type of account in which cash can be deposited for further use for financial purposes or emergencies, with limited interest, to ensure that it does not melt in the face of inflation and where savings can be safely stored. This account, which will be opened separately from the bank account used for current expenditures, also ensures that the money to be saved is not confused with other spending. The most critical disadvantage of savings accounts is their low rate of return, but savings accounts are the safest investment tool.
Definition of a Savings Account
Savings accounts include different interest rates depending on reasons such as inflation data released by the government and the amount of money needed in the markets. Although interest rates vary from bank to bank, the lower and upper-interest limits are determined according to market conditions. Banks can give interest at lower and upper limits according to their liquidity needs.
When calculating interest on deposit time accounts, you are also subject to taxes based on your income. Net interest income is added to your principal after deducting expenses such as taxes, account maintenance fees, etc., from the interest amount according to the maturity period.
Interest is the cost of money. Since banks make the deposits they collect from consumers use as loans to other consumers, they take into account the cost of these transactions when determining the interest rate for both products. Banks interest rate; It defines the real risk-free interest rate, expected inflation rate, maturity risk premium, default risk premium, and liquidity risk premium.
Benefits Of Savings Account
The primary mission of bank accounts is security. No one wants to walk around with a large amount of money or keep their money at home. In both cases, it carries risks such as theft. In countries with high inflation, banks provide high interest rates so that investors’ savings do not melt in the face of inflation. Bank rates are also low in countries with low inflation, such as the USA. While some investors use more risky but high-return investment instruments such as the stock market, others prefer saving accounts that allow you to make low-profit but stable and secure savings.
The primary purpose of having a savings account is to deposit money at a safe place and at the same time earn interest on it.
How To Open A Saving Account
To open a savings account in the US, submitting a Social Security Number (SSN) to the bank will speed up the process. Application processes for non-SSN holders may take longer as the bank will need to review other documents.
Opening a bank account can now be done in minutes. This process may take longer for those who will open a bank account for the first time or for account opening transactions from abroad. At this point, the correct and complete delivery of the information requested for the bank opening transactions affects the process. If you cannot verify the correct information on the application, your savings account application will probably be denied.
Those who cannot provide an SSN, for example, foreigners, can use an individual taxpayer identification number (ITIN), which the bank can also accept. To obtain an ITIN, you must apply to the IRS and fill out a W-7 form.
Saving Accounts Maturity Periods
Savings accounts can be opened both individually and corporately. By opening a time deposit account, you evaluate your investment during the maturity period. The minimum maturity defined for time deposit accounts is 30 days in most banks. Although the maturity periods vary from bank to bank, deposit accounts are generally opened with periods of 1 month, three months, six months, or one year.
The interest income will be canceled if the money deposited in the deposit account is withdrawn before the deposit date. For example, 1000 USD deposited in a bank with 1.5% interest for three months will yield a maturity of approximately 45 USD at the end of three months. However, if you withdraw the principal at the beginning of the second month, you will also waive the interest income. However, some banks offer options during the deposit period. For example, some banks provide depositors options where the remaining amount in the bank will not expire, even if they withdraw money between maturity.
How Saving Accounts Profit
Saving accounts provide an interest gain on the principal amount according to a fixed interest rate determined by the bank. According to the interest rate announced by the bank based on the maturity range, your earnings increase. Each bank comes up with different interest rates and different maturity dates.
What is the Difference Between Saving Accounts & Checking Accounts
Savings Accounts are known as perpetual accounts. Time deposit accounts are opened for a specified number of days and earn money in the process.
Checking Accounts is not subject to any interest. The Saving Accounts offers an interest rate based on the deposit and the number of days.
You can withdraw the money from the Checking Account as you wish. The money in the time deposit account can also be withdrawn, but the banks do not pay interest on the money withdrawn before maturity.
Savings Accounts offers account holders an interest income. No interest in checking accounts
What is FDIC?
The Federal Deposit Insurance Corporation (FDIC) is an independent government agency operating under the federal government in the United States (USA). Its primary purpose is to establish and maintain public confidence in the American financial system. FDIC, founded in 1933 to restore the confidence of the American people in the banking system after the 1930 recession. If the bank you will open an account within the USA is a member of the FDIC, the money in your account is insured against the bank’s risk of bankruptcy.
FDIC insurance provides reimbursement assurance to depositors if a bank is unable to pay depositors or has declared bankruptcy. The FDIC offers a refund guarantee up to certain limits, usually $250,000 per account holder. The purpose of FDIC insurance is to increase confidence in the banking system.
Types Of Savings Accounts
- Traditional or Regular Savings Account
These types of accounts are also called basic savings accounts. Generally, it has lower interest rates than other savings products. The minimum investment rate is low. Therefore, by depositing a small amount of money, this type of account can be opened. Traditional or Regular Savings Accounts allow you to withdraw some of your money in the bank before the deposit expires, without the interest on the deposit. These bank accounts can be managed with internet banking and mobile banking.
• Opening a Traditional or Regular Savings Account is easy, not only at the branch but also online. Many banks allow you to open this type of account via internet banking.
• It is a suitable account type to evaluate and secure savings by earning interest on deposits.
• Interest rates are low in this type of saving account. Better alternatives can be found.
• Interest income may be reset when an account maintenance fee is charged for this account type.
- High-Yield Savings Account
High-Yield Savings Accounts are one of the highest-yielding account types among saving accounts. These are savings accounts that offer a higher APY compared to regular savings accounts. It is a privileged high-interest option, which is usually given to deposits made through mobile banking. You may not get the same interest rate from the bank branch. It is preferred by customers who are accustomed to using internet banking. Banks that provide online services try to attract customers by offering high-interest rates as well as minimum expenses. If you are going to deposit money in an online bank, you should choose banks with FDIC or NCUA insurance. This is important for the safety of your money. As additional information, the upper limit for insurance coverage offered by the FDIC is $250,000. Your deposit exceeding this amount will not be covered by insurance.
• Offers high-interest yields compared to traditional savings accounts
• Online service universe banks set a lower minimum deposit rate for savings accounts.
• An online bank usually does not charge or has a very low account maintenance fee.
• Since online banks do not have branches, you can only deposit cash through partner ATMs.
• Transferring money from online savings account to a different bank account can take several days.
• Online banks usually serve from ATMs of contracted banks. Sometimes these ATMs are too few or too far from your location.
- Money Market Accounts
You get a deposit account with deposit account features when you open a money market account (MMA). It is possible to open an MMA account in both real and virtual banks.
This type of account is also called money market savings accounts, MMSA for short. MMAs generally have higher interest yields than standard savings accounts. You can write checks from your MMA account or buy and sell funds from your debit card.
Like regular or high-yield savings accounts, this type of account is now easier to buy and sell funds with eased federal Regulation D restrictions. It is possible to withdraw money or buy and sell funds from this account, but most banks charge additional fees from saving accounts that transfer money more than six times a month. Some banks are turning off the deposit feature of their frequent deposit accounts.
• MMA savings accounts can offer higher deposit rates than standard savings accounts.
• MMA Accounts are suitable for writing checks, using ATM cards and debit cards.
• You can open money market accounts on all exchanges through traditional banks or online banks.
• The minimum deposit required for MMA account opening is higher than for standard accounts.
• Interest rates can be gradual, meaning that the more money you deposit, the higher the interest rates available to you.
• Many banks charge monthly fees for MMA accounts.
- Certificate of Deposit Account
Certificates of deposit (CDs) are time deposit accounts. Once you open a CD account and deposit money, you cannot withdraw your funds during the deposit period. You agree to leave it in the account for a certain period of time.
In order to withdraw money or extend the duration of the CD by affecting the accumulation of interest, you must wait for the expiry of the deposit. During this time, your money earns interest.
The CD account type is accepted in both traditional banks and online banks. CD maturities can typically be opened with a minimum term of 30 days and a maximum of 60 months. CD accounts are suitable for very long-term deposits. Because the deterioration of the maturity before the deposit period can cause severe losses in long-term deposits, opening multiple CD accounts with variable due dates may be a solution. For example, for 500,000 USD, you open five different CD accounts, each containing 100,000 USD. Deposit accounts opened in this way are called CD ladders.
• CDs offer above-average interest rates for both short-term and long-term deposits.
• CD accounts generally do not include account maintenance fees.
• Online banks may offer higher interest rates with lower charges for CD accounts.
• Withdrawals from CD accounts before maturity may result in loss of interest income earned.
• Traditional banks charge lower interest rates than CD deposit rates offered by online banks.
• Opening a very long-term CD account prevents you from taking advantage of possible future interest rate increases.
- Cash Management Account
Cash management accounts are not just savings account. CMA accounts allow you to save to invest in a taxable brokerage or retirement account. Cash management accounts directed by brokerage houses generally earn more than deposit interests. CMA account holders can write checks, pay bills, transfer funds to other bank accounts.
• The advantage of CMA is that interest can be earned on the money invested at the same time.
• CMA accounts offer the benefits of both checking and savings accounts at the same time.
• Such accounts are not standard deposit account but are eligible for FDIC insurance.
• CMA accounts can sometimes offer lower returns than deposit accounts.
• Since CMA accounts are linked to online brokerage accounts, there is no bank branch where you can get service.
• Some CMA accounts are not covered by FDIC insurance.
- Specialty Savings Account
Dedicated savings accounts include a number of different options created for a purposeful saving or for groups of a certain age or status. For example, individual retirement accounts and health accounts are accounts that provide long-term savings for a specific purpose. These types of accounts generally allow you to increase your savings by purchasing certain funds in your deposit account, which is accumulated by the money you deposit at regular intervals. There may be various restrictions on such accounts. For example, there may be restrictions such as the minimum waiting period for the money you deposit for an individual retirement account or that it cannot be withdrawn until you reach a certain age.
Special savings accounts can be opened as savings accounts for children who are not generally of age to open a bank account. Or it can be opened for students. Banks do not only open these types of savings accounts. Some investment firms or brokerages are eligible to open this account and may even offer more attractive offers than banks.
Examples of SSAs:
• Kids’ savings accounts
• Student savings accounts
• 529 college savings accounts
• Individual Retirement Accounts
• Health Savings Accounts
• By focusing on a specific purpose, it allows you to save money for that purpose only.
• It is a convenient method to earn deposit interest on your accumulated money and to keep your money safe.
• These types of accounts usually do not have a monthly maintenance fee.
• Some specialty accounts, such as IRAs, 529s, and HSAs, may have time-limited withdrawals. Early Withdrawing can result in tax losses, not just deposit income.
• Private accounts may have restrictions on who is authorized to use the account and withdraw funds from the account. For example, a child’s account may not make it possible to use funds deposited in that account until the child is of age.