How Does a Savings Account Work?

If you’re looking to save money, it’s helpful to have an account separate from your standard checking account. That way, you can put the money out of sight, making it easier to avoid spending it.

Chances are, you already have a savings account of some kind. But how exactly do savings accounts work? Here’s everything you need to know about savings accounts.

What is a savings account?

A savings account is a type of bank account designed to help you save money. These accounts are offered by most banks and often come bundled with checking accounts.

Savings accounts pay interest on your money, which helps you grow your savings. With that said, the annual percentage yield (APY) on savings accounts is relatively low compared to other savings vehicles.

Savings accounts are extremely safe, however. Your money is guaranteed by the Federal Deposit Insurance Corporation (FDIC). The FDIC provides insurance for up to $250,000 per person, per bank. If the bank were to go out of business, FDIC insurance would kick in to ensure that you still have access to your $250,000. There is no FDIC coverage for deposits in excess of $250,000.

The main purpose of a savings account is to save rather than spend. As such, it does not come with a debit card or checks. Customers can transfer money to and from their checking account in order to spend funds — but spending directly out of a savings account is not typically advised.

In fact, savings accounts often place a limit on the number of withdrawal transactions a person can make. Many savings accounts are limited to six withdrawals per month. This limit is no longer required by law, however, some banks now allow unlimited transactions.

Ultimately, a savings account is simply a bank account designed for saving. These accounts are easy to open, simple to use, and often free. And they do pay interest, although not as much as other types of investments or savings vehicles.

Some savings accounts may charge a monthly fee. Others are completely free. And still others may require that you have a minimum balance on deposit in order to avoid a monthly fee. For best results, choose a savings account that doesn’t have a monthly maintenance fee.

Checking vs. savings accounts

The two main types of bank accounts are checking accounts and savings accounts. The differences are mainly in the purpose of the account — a checking account is meant for spending, while a savings account is meant for saving.

A checking account is most people’s primary bank account — it is where they receive direct deposits or deposit their paychecks. Checking accounts come with a debit card and a checkbook that can be used for making payments and purchases. Checking accounts sometimes pay interest, but not often — and if they do, the APY is usually very low.

Savings accounts are a bit more restrictive. They don’t come with a debit card or a checkbook, and they may be limited in the number of withdrawals allowed per month. On the other hand, they typically pay higher interest rates than checking accounts.

Benefits of a savings account

Savings accounts make it easier to save money and work toward your financial goals. Here are the main benefits.

Pays interest: Savings accounts pay interest on your savings. Interest will typically be deposited on a monthly basis. For example, if an account pays 1% APY and you have $1,000 deposited, you will earn $10 per year in interest — or about $0.83 per month.

A separate account to save: Having a separate account used solely for saving can help you set money aside for your various financial goals. If you simply keep all your money in checking, it can be easier to spend it. Having some level of separation is beneficial both psychologically and practically.

Safe and insured: Your money is extremely safe in a savings account. You can’t lose money like you can with something like investing in stocks. And even if something were to happen to the bank, accounts are insured for up to $250,000 by the FDIC.

Simple to use: Savings accounts are simple to open and use. They are typically linked to your primary checking account at your bank, so transfers to and from checking are easy and often instantaneous.

Withdraw at any time: Unlike savings products like certificates of deposit (CDs) and bonds, money in a savings account can be withdrawn at any time.

Drawbacks of a savings account

There are some disadvantages to savings accounts to consider, as well.

Low interest rates: Many savings accounts pay relatively low interest rates. Certain types, like high-yield savings, may offer better rates. But ultimately, you can typically earn more money elsewhere by investing or utilizing high-yield cash apps like Tellus. Tellus offers three high yield cash accounts that pay up to 34x more interest than a traditional savings account while keeping you completely out of the stock or crypto markets. Plus, Tellus is 100% free to use and you’re free to move your money as you wish.

May have fees: Some savings accounts have monthly maintenance fees. For instance, a bank may charge you $5 per month just to have a savings account. This will often offset the interest you earn, making having a savings account somewhat pointless. It’s best to look for banks that offer savings accounts without maintenance fees.

Withdrawal limit: Some banks have a limit on the number of withdrawals you can make each month from a savings account. This number is typically six, and while this limit was required by law until 2020, it’s since been repealed. Some banks still have it in place, however.

May require a minimum balance: Some accounts require you to have a minimum balance on deposit — $100, for example. Others may charge a fee if your balance falls below this threshold.

How does a savings account work?

Savings accounts function similarly to standard bank accounts. Savers can deposit funds directly into their savings account at their bank or transfer money in from their checking account. Money can be withdrawn at any time without any sort of penalty or fee.

These accounts come with a routing number and account number, which can be used to make external deposits and withdrawals. Keep in mind that withdrawals may be limited to six per month, however.

Savings accounts pay interest on deposits. The rate of interest will vary depending on the bank and current market conditions. Most banks use a variable rate, which means the APY they offer on accounts can change at any time.

Savings accounts are offered by just about every bank and credit union. Money deposited into these accounts is used by banks to issue loans, which is why your bank can afford to pay interest on your deposits.

Although the bank technically loans out your money, you can still withdraw funds at any time. Banks are simply required to have adequate funds on deposit in order to back the loans they make. Individual customers can still access their funds at any time, without penalty.

Do savings accounts cost money?

Some banks charge a monthly fee for savings accounts. This can range from $1 to $12 per month or more.

Some financial institutions will waive the monthly fee if you maintain a certain minimum balance. For example, a $5 monthly fee may be waived if you maintain a minimum balance of $1,000 in the account.

Other banks offer savings accounts with no monthly fees. To maximize your savings potential, look for account options that don’t have any fees.

Keep in mind that there may be other miscellaneous fees, as well. You may be charged a fee for over-drafting your account, for instance. Check with your bank for details on their fee structure.

How much interest do savings accounts pay?

Savings accounts pay interest, which is measured in annual percentage yield (APY). APY refers to the percentage of interest you would earn on a deposit that is deposited for one year (12 months).

For example, an account with a 1% APY would pay out 1% of the initial deposit in one year’s time. A $100 deposit would therefore earn $1 over that one-year period. Interest is typically paid monthly.

Each account will have a different interest rate. Some accounts pay no interest at all, while others pay a generous rate. Interest rates also change frequently with market conditions. If interest rates are rising, yields on savings accounts may also rise.

The vast majority of savings accounts pay very little interest. In fact, the national average is just 0.13% APY. That means a $100 deposit would only earn $0.13 in interest in a year.

To get a more competitive yield, savers must often shop around for a better account option — like a high-yield savings product.

Tellus is a smart savings platform that consistently pays between 3% and 4.50% APY on your savings. Tellus is backed by real estate and offers high yields to savers — without exposure to the stock or crypto market. Learn how Tellus works here.

Keep in mind that this interest is taxable income and will be reported on Form 1099-INT if you earn at least $10 in a year. Amounts under $10 are still required to be reported on your taxes, but they will not result in a 1099-INT form.

Are savings accounts safe?

Yes — savings accounts offered by banks are extremely safe. You can withdraw money at any time, and your savings won’t be subject to stock market price fluctuations or anything of that nature.

Even if your bank were to fail, deposits are FDIC-insured for up to $250,000 per account. If you have more than $250,000 in savings, it’s recommended that you open a separate account at a different bank to make sure all your savings are insured.

Types of savings accounts and savings products

There are various types of savings accounts that each work differently. Then there are other non-bank savings products. Savings accounts are offered by banks, while other savings products are available from private financial institutions other than banks. Here’s an overview of popular savings options.

Standard savings account

A standard savings account is offered by just about every consumer bank and credit union out there. This type of account is discussed in great detail above.

Standard bank accounts offer easy access and simplicity. However, they tend to pay very little in interest.

High-yield savings accounts

High-yield savings accounts are offered by select traditional banks and many online banks. These accounts function in the same way as standard accounts, but they pay a substantially higher rate of interest.

Most of the best high-yield savings accounts are offered by online banks, which keep costs down since these banks have no physical branches. This allows such banks to pay higher rates of interest to savers.

Tellus high-yield cash accounts

Tellus turns your savings into passive income by unlocking the value of durable residential real estate lending.

A Tellus account pays on average 23-34x more interest than a traditional savings account while keeping you completely out of the stock or crypto markets. Deposit any amount within minutes and earn 3.00% to 4.50% APY on your money, paid out daily, and withdraw anytime. Plus, Tellus is 100% free to use!

Tellus is not a bank. Deposits are not FDIC-insured. However, Tellus offers returns that are highly protected, predictable and consistent because it’s backed and powered by the most durable class of US real estate.

Tellus generates its revenues as a non-bank lender, and provides mortgages — loans secured by residential real estate. Tellus’ loans are typically short duration (approximately 12 months) and are always over collateralized (i.e. the value of assets held as collateral is always greater than the value of the loan amount), which offers ample protection should real estate prices soften. This enables us to offer a variety of rewards, including top of market interest payments, and we deposit them into our members’ accounts daily.

And just like a savings account, you can withdraw funds from Tellus at any time. There are no lockup or mandatory waiting periods — you can deposit or withdraw at any time.

There are no fees to use Tellus, and opening an account is simple. Join today to see how Tellus is changing the game for savers everywhere.

Students’/children’s savings accounts

Many banks offer savings accounts designed for children, teens, or college students. These are usually simplified versions of standard savings accounts, and they often offer special perks.

For example, most of these accounts don’t have fees or minimum balances. This is great for children, as they often start with very small amounts of money. Some accounts may also have other perks, like bonus rewards for good grades.

In most cases, students’/children’s savings accounts require parental permission to open — and parents may need to have their own accounts at the same bank.

Often, these accounts are set up to automatically convert into standard savings accounts once the account holder becomes a legal adult.

Specialty savings accounts

There are many other specialty accounts and savings products worth considering. Here are just a few.

Money market accounts combine the features of a savings account with basic checking account features, like a debit card. They pay interest and are FDIC-insured.

Certificates of deposit (CDs) lock up your money for a designated period of time in exchange for a higher interest rate. For example, you can buy a six-month CD that will pay a certain interest rate for six months. You can’t access the funds before the six-month mark without paying a fee.

Tellus offers a similar product, called Vaults.

Vaults is Tellus’ long-term savings product that allows you to lock-in a high interest rate for a fixed period of time in exchange for locking up your money for the same duration.

For now, you can choose between three (3) Vaults:

If you’re saving thousands or hundreds of thousands, Vaults is a great option for you! There’s no upper limit to the amount of money you can keep in a Vault (the minimum balance to fund a Vault is $1,000). And just like all of the other accounts Tellus offers, your interest will compound every single day. Learn more about Vaults here.

Health savings accounts (HSAs) are designed to save for healthcare expenses. They provide generous tax benefits. HSAs are only available to people on certain types of high-deductible health insurance plans, so their use is fairly limited. If you have an HSA available to you, it’s well worth using.

Retirement accounts are designed to save for retirement, and funds are typically invested in stocks and other assets. They offer generous tax benefits, but there can be penalties if they are withdrawn before retirement age. Retirement accounts are not true “savings” accounts; rather, they are investment accounts. With that said, if your goal is to save for retirement, these accounts offer significant perks.

Bottom line

Savings accounts are accounts that pay interest on your savings. They are designed for saving rather than spending. They don’t come with a debit card, and they may have a transaction limit of six per month.

Each savings account type pays a different amount of interest, so it’s important to compare your options. Tellus is a smart savings platform that lets you earn 3.00% to 4.50% APY on your savings. Learn more about how Tellus works here.