A regular savings account is perhaps the simplest and oldest type of bank account, with funds in the account being completely liquid and earning interest. The annual percentage yield generally is not that high, with interest in this type of savings account compounded daily in most cases. Regular savings accounts differ from certificate of deposit savings, which force you to keep your money with the bank for a specified length of time. With a CD, if you withdraw funds early, you will be assessed a fee. This not the case with a traditional savings account; withdrawals can be taken at any time without penalty. You also can withdraw money as often as you like, although you might be subject to maintaining an account minimum balance to avoid monthly service fees.
When you deposit funds into a bank savings account, you essentially are granting a loan to the bank. The bank will then invest that money as it desires, and pay you interest in return. A standard savings account is one of the safest investments available, as there is no possibility of your account balance decreasing (assuming you are not being assessed fees). This is in contrast with stocks, bonds, mutual funds, and annuities; even with President Obama’s finance bill, there is still a possibility that you can lose some or all of your principal with these types of investments.
Regular savings accounts also have an additional level of safety because your funds are protected against the bank failing if your account is insured by the Federal Deposit Insurance Corporation (FDIC). Basically, FDIC insured savings accounts are guaranteed up to $250,000; however, there are exceptions based on other accounts you might have at the bank. Here is a summary of how the insurance limits work:
- For single accounts (you are the only owner), you are insured up to $250,000 for all of the accounts in the same institution. If you have two individual accounts at the same bank (a savings and a checking account, for instance), and their balances add up to more than $250,000, you are only insured for $250,000.
- For joint accounts, each co-owner is insured for a total of $250,000 for all of the joint accounts at the same bank, and these accounts are categorized separately from single accounts. In other words, if you have a single account with $250,000, and your spouse has a single account at the same bank with $250,000, and you both are co-owners on a joint account with $500,000, all of your balances are insured. You are insured for $250,000 on each of your accounts, and your spouse is insured fully on both of his or her accounts too.
- There are additional categories with their own $250,000 limits, including retirement accounts and revocable trust accounts. Consult your local bank or the FDIC deposit insurance page for more information.
One thing to keep in mind when dealing with these limits is that the status of banks and accounts can change suddenly. For example, if you have a single savings account with $200,000 in it, and you have another account with the same balance at another bank, you will be completely insured because the accounts are at different institutions. However, if the two banks merge, you suddenly will be insured for only $250,000 and not the full $400,000 because now both accounts are at the same bank. In a different scenario, if you have a joint $500,000 account with your spouse, it will be covered fully by FDIC insurance; but if you or your spouse were to pass away, the amount of insurance would be cut to $250,000, meaning half of the account would no longer be covered.
Because your money is so safe in a regular savings account, it is an excellent vehicle for keeping funds that you will likely need in the short term. If you know that you will not need to touch the money for a set amount of time, then perhaps a certificate of deposit savings is more appropriate. With a CD, you most likely will earn more interest, but you cannot withdraw money without a penalty until the maturity date. If you can find one, a high interest savings account might be a good option too; this type of account likely will have fewer restrictions that a CD, but pay a higher interest rate than a traditional savings account APY. Internet savings accounts are good options too because they often pay high interest as well.
Bank savings accounts are good to have because they help you do exactly what the name implies: save. You can set up a checking account or other funding source to make deposits to your savings automatically; in this sense, this type of account might be thought of as a “regular saving account” or even a “regular saver account.” Regardless of how you refer to it, a savings account is an important part of your portfolio, especially if you need to prepare for large expenditures in the near future.
If you decide that this is the type of account you want, choosing the best regular savings account then means looking at the different features available. The first factor is the interest rate, of course, as you will want to earn as much money as possible. You also should be aware of the bank fees involved with the account. Another issue to consider is the reputation of the bank, especially regarding the level of service that is offered. Finally, and this is particularly important with an internet savings account, you will want to know exactly how you can access your funds. With online banking, it can be several days or even weeks before you receive the cash from a withdrawal. Similarly, deposits can take awhile to process as well. Evaluating all of these factors are important in choosing which account and bank is right for you.