What is a Savings Account? Different Types & How They Work (2024)

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 Synchrony Bank 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 Synchrony Bank 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.


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 Synchrony Bank, 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, Synchrony Bank 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 Synchrony Bank, 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. Synchrony Bank 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:

-Date of Birth
-Social Security Number
-Potential funds to deposit
With Synchrony Bank, you can open an account in just minutes.

If you're already a Synchrony Bank 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 Synchrony Bank customer, you can apply online or call us directly at 1-866-226-5638. 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 Synchrony Bank 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 Synchrony Bank'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.

What is a Savings Account? Different Types & How They Work (2024)


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

Regular savings account: earns interest and offers quick access to funds. Money market account: earns interest and may provide check-writing privileges and ATM access. Certificate of deposit, or CD: usually has the highest interest rate among savings accounts, but no access to funds.

What are the three 3 types of savings accounts? ›

There are different types of savings accounts to choose from, and they're not all alike. The options include traditional savings accounts, high-yield savings accounts, money market accounts, certificates of deposit, cash management accounts and specialty savings accounts.

What are the 4 savings accounts? ›

  • Basic Savings Account. Also known as passbook savings accounts, these accounts are a good introduction to earning interest and saving money. ...
  • Online Savings Accounts. ...
  • Money Market Savings Accounts. ...
  • Certificate of Deposit Account.

What is a savings account and how does it work? ›

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.

What is the best type of savings account? ›

High-yield savings accounts—typically found at online banks, neobanks and online credit unions—are savings accounts that offer a higher APY compared to regular savings accounts. This is one of the best types of savings accounts to maximize your money's growth.

What is safer than a savings account? ›

U.S. government securities–such as Treasury notes, bills, and bonds–have historically been considered extremely safe because the U.S. government has never defaulted on its debt. Like CDs, Treasury securities typically pay interest at higher rates than savings accounts do, although it depends on the security's duration.

What are three disadvantages of savings accounts? ›

Savings account benefits include safety for your savings, interest earnings and easy access to your money. However, savings accounts may have drawbacks, such as variable interest rates, minimum balance requirements and fees.

How to choose a savings account? ›

What to look out for when choosing a savings account
  1. Many savings accounts require a minimum deposit amount. ...
  2. Some savings accounts restrict the number of withdrawals you can make. ...
  3. Introductory bonus rates and offers often end after the first year. ...
  4. Risk levels vary between different types of savings account.

What is the 7 rule for savings? ›

The seven percent savings rule provides a simple yet powerful guideline—save seven percent of your gross income before any taxes or other deductions come out of your paycheck. Saving at this level can help you make continuous progress towards your financial goals through the inevitable ups and downs of life.

Does your money grow on a savings account? ›

A traditional savings account is essentially a place to hold your money that earns interest. This type of account allows you to save money and earn interest on any money you deposit into it, although the rates it offers are low—typically around 0.01%.

Can I withdraw money from my savings account? ›

Typically, yes — your money is yours. But a savings account is designed to discourage frequent transactional use and may carry monthly withdrawal limits. Exceeding these limits can incur fees, have your account re-classified or have it closed altogether.

Is it worth getting a savings account? ›

A savings account is a safe place to put your money when you can't afford to lose any or think you'll need it in an emergency. It's also a good place to put some of your investments as a hedge against losses – you can't lose everything if some of your money is in an ordinary savings account, after all.

Do you lose interest if you withdraw from a savings account? ›

The interest earned on your account is based on your account balance. If you withdraw money from a savings account, you may not earn as much interest as you would have if you kept all your money in the account.

What is better than putting money in a savings account? ›

If you don't need the money for at least five years (or longer) and you're comfortable taking some risk, investing the funds will likely yield higher returns than saving. If you're eligible for an employer-match in your retirement account such as a 401(k).

How much money should you have in your savings account? ›

Generally, experts recommend saving three to six months' worth of living expenses in an emergency fund. Ginty, however, suggests that people with children or dependents save more than that. “If you're a single parent, I'd recommend at least six months, but somewhere between six and 12 months.

Which bank gives 7% interest on savings accounts? ›

Which Bank Gives 7% Interest Rate? Currently, no banks are offering 7% interest on savings accounts, but some do offer a 7% APY on other products. For example, OnPath Federal Credit Union currently offers a 7% APY on average daily checking account balances up to and under $10,000.

What is the 3 saving rule? ›

This model suggests allocating 50% of your income to essential expenses, 15% to retirement savings and 5% to an emergency fund. This plan allows you to meet your immediate needs and plan for the future before you spend on anything else.

What is the 3 type of account? ›

3 Different types of accounts in accounting are Real, Personal and Nominal Account. Real account is then classified in two subcategories – Intangible real account, Tangible real account. Also, three different sub-types of Personal account are Natural, Representative and Artificial.

What is the most common type of savings account? ›

A traditional savings account is the most common type of savings account. Banks will usually offer you a small amount of interest for keeping your money with them.

Can I have 3 savings accounts? ›

There's no limit to the number of savings accounts you can have, but the key is to make sure you can manage them all. Learn why you may want to have as many savings accounts as you have savings goals, and what to consider when shopping for a savings account.

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