Understanding Savings Account: The Basics Explained

We all have dreams and goals that we want to achieve. Maybe it’s a cozy beachside getaway, a new car, or securing a comfortable retirement. By saving money you can make those dreams a reality. That’s where you need a savings account.

In this article, we’ll explore the process of starting a savings account and uncover the strategies to maximize its potential.

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Table of Contents

    Historical overview of saving

    The concept of saving has roots in ancient civilizations, where people stored their valuables in temples or secure locations. This act of putting aside resources for the future provided a sense of security and communal well-being.

    In medieval Europe, individuals began depositing their money with trusted goldsmiths and craftsmen who offered secure storage. These early depositors were given receipts that could be exchanged for their stored goods or money. This practice laid the foundation for the development of modern banking by establishing the idea of safely storing wealth with trusted custodians.

    By the 17th and 18th centuries, recognized banking institutions emerged in Europe, offering safe storage and allowing for the deposit and withdrawal of funds. Interest-bearing passbook accounts gained popularity, enabling customers to earn interest on their savings while maintaining easy access to their funds. And by the 19th century, savings and loan associations became prominent, particularly in the United States. These institutions focused on encouraging saving and providing mortgages. People could deposit their savings in these associations, earn interest while also contributing to a common pool of funds for mortgage lending, which helped foster homeownership.

    Following World War II, savings accounts became more readily available. Governments and banks acknowledged the significance of savings in promoting economic stability and development. Interest-bearing savings accounts became more prevalent, allowing individuals to earn interest on their deposits while fostering a culture of saving.

    In recent decades, savings accounts have continued to evolve to meet changing customer needs and technological advancements. Online banking has made it easy to access and manage savings accounts from anywhere. People can now control their finances remotely. Banks also offer different types of savings accounts, like high-yield savings and retirement savings. These options let people customize their savings strategy to match their goals.

    Throughout history, the underlying purpose of savings accounts has remained consistent: to offer individuals a secure place to deposit and grow their savings while earning interest. 

    Read Also: How to Be Your Own Bank In Just 4 Steps

    What is a Savings Account

    A savings account is a type of bank account that allows individuals to securely deposit and store their money. It’s designed for the purpose of saving rather than daily transactions, which makes it suitable for medium term goals.

    When you deposit money in your account, you earn interest based on the bank’s interest rate or the prevailing market conditions. But unlike other investment options, you have the added advantage of accessing your money whenever you need it. To make withdrawals and transfers simpler, banks provide online banking, ATM withdrawals, and other services. Savings accounts are also safe since the deposits are insured by the Federal Deposit Insurance Corporation (FDIC).

    Some other key features of savings accounts are:

    • They often provide ATM cards, allowing account holders to withdraw cash and check account balances conveniently.
    • They provide a safe way to earn interest on deposited funds, with rates that may vary among different banks and can be influenced by market conditions.
    • They have little to no monthly maintenance fees, allowing account holders to save without worrying about excessive charges.
    • Some banks offer automatic savings plans, allowing customers to set up recurring transfers from their checking accounts to savings accounts. This promotes consistent savings habits and helps individuals reach their financial goals.

    Before choosing to own a savings account, it is worth considering the purpose for owning it. Do you want to build a saving habit? Store money? Or perhaps earn money? Your reason determines what factors to consider such as the minimum balance requirements if you simply want to store money, its potential inflation risk and low returns if you want to grow your money, and so on. 

    Read Also: How to Make Your Money Work For You

    Beyond these, savings accounts are highly popular among people looking to effectively manage their money at low-cost and minimal risks.

    So how does it work?

    How to open a savings account

    1. Research and compare: Start by researching different banks and their savings account offerings. Start by researching different banks and their savings account offerings. Compare their interest rates, fees, minimum balance requirements, and any other benefits.
    1. Pick a bank: Select a bank that aligns with your requirements. Evaluate factors such as customer service, online banking capabilities, and other features that hold significance for you.
    1. Obtain the necessary paperwork: To open a savings account you’d need certain documents like an ID, proof of address, and others to verify your identity.
    1. Apply: Depending on your preference, you can either fill out your application at the physical bank or apply online.
    1. Deposit funds: Most banks require you to make an initial deposit to activate the account. The bank will let you know the minimum amount needed.
    1. Review and sign the agreement: Review the terms and conditions associated with the savings account and ensure you’re comfortable with them before signing.

    How to manage a savings account

    Managing your savings account is crucial to ensure your financial success and it often involves tracking and maximizing your deposits and withdrawals.


    Savings accounts offer a deposit feature that is at the core of their purpose. You open the account by making an initial deposit, which varies depending on the bank, and you also maintain it by making regular deposits. This consistent saving habit is key to helping your account grow over time. Whether you deposit money weekly, monthly, or whenever you have extra funds, it all contributes to the growth of your savings.

    To make a deposit, banks provide various methods to accommodate your preferences. You can visit a branch in person to deposit cash or checks. Furthermore, many banks offer convenient online or mobile banking services that allow you to transfer funds from your checking account into your savings account with ease. This flexibility saves you the time and hassle of visiting a physical branch.

    Direct deposit is another useful feature offered by many banks. It allows you to automatically transfer regular payments, like your salary, directly into your savings account. This means your savings will keep increasing effortlessly, without you having to do anything manually.


    When it comes to withdrawals, keep in mind that savings accounts are meant to help you save money. But sometimes things happen and you’ll need to access your money. In these situations, banks provide a variety of practical withdrawal options, including in-branch withdrawals, ATM withdrawals, online transfers to your checking account, and even mobile banking.

    It’s crucial to remember that the majority of savings accounts have monthly withdrawal caps. This cap is typically set at six withdrawals per month, but it’s important to confirm with your bank what their specific rules are. If you withdraw more than the allowed amount, your savings account might be charged fees or turned into a checking account.

    Nonetheless, evaluate your needs carefully before making a withdrawal. It’s crucial to time your withdrawals wisely. And since savings accounts provide interest on your deposits, it’s recommended to let your money sit and grow for as long as possible.  If your savings account offers tiered interest rates based on the account balance, consider maintaining a balance above a certain threshold to enjoy higher interest earnings.

    Read Also: Best ways to save money when building a house

    Interest rates

    This refers to the percentage of money that a financial institution, such as a bank, pays you for keeping your funds in a savings account. It is determined by the bank, and may be subject to fluctuations depending on the state of the market or your account type. 

    Banks often use your savings to issue loans or make investments – it’s how they make money. They then pay you interest as compensation for using your funds. So, the longer your money remains in the account, the more the interest accumulates, which allows your savings to grow over time.

    Simple Interest

    This is the most common type of interest rate on savings accounts. It is calculated based on the principal amount deposited and the predetermined interest rate. The interest earned is typically paid out on a regular basis, such as monthly or annually, and it does not compound.

    Features of a Simple Interest Savings Account

    • Transparency: With a simple interest savings account, you know exactly how much interest you will earn since it is calculated solely based on the principal amount and the agreed-upon interest rate.
    • Predictability: The interest earned remains consistent throughout the account’s duration, making it easier to forecast the growth of your savings.
    • Regular Payouts: Interest is typically paid out at regular intervals, such as monthly or annually. This provides a steady stream of income if needed.

    Compound Interest 

    This is a way to earn interest not only on the money you first deposit but also on the interest you’ve already earned. Basically, when the bank adds interest to your account, the next interest payment is calculated based on the new total. This helps your savings grow faster over time.

    Features of a Compound Interest Savings Account

    • Faster Growth Potential: Compound interest has the ability to accelerate your savings growth over time. As the interest earned is added back to your principal, you begin to earn interest on that additional amount, leading to exponential growth in the long run.
    • Powerful Effects of Compounding: The more frequently interest is compounded, the faster your savings can accumulate over time. Therefore, savings accounts that compound daily or monthly, provide greater returns compared to simple interest accounts.
    • Excellent for Long-Term Savings: Compound interest works best if you have a long-term goal, such as saving for retirement or a major future expense. The compounding effect causes your savings to increase significantly with time. So the longer the better.

    Choosing between a simple interest or compound interest savings account depends on your financial goals, time horizon, and risk tolerance. A simple interest account might be a good choice if you like simple and predictable patterns. However, a compound interest account might be a better option if you are interested in long-term growth and you’re fine with unpredictability.

    Fees and charges

    When deciding to open a savings account, it is important to consider fees and charges. These costs can significantly impact your earnings and overall savings growth. Savings accounts are often subject to a number of fees, such as minimum balance fees, withdrawal fees, and maintenance fees, which are charged by numerous financial institutions. So, before opening one, find accounts with reasonable fees and competitive interest rates, or even better, accounts with no fees at all. Here are some charges associated with savings accounts:

    • Monthly Maintenance Fee: This is a common type of fee charged per month for maintaining the savings account. Different banks have varying fees, and may be waived on certain occasions.
    • Minimum Balance Fee: Many types of savings accounts have a minimum balance requirement. If your savings fall below this balance, it may result in a fee being charged. 
    • Excess Withdrawal Fee: Most banks typically limit the number of withdrawals or transfers you can make from your savings account per month. Once you pass that limit, you incur charges. This encourages you to keep your savings intact.
    • ATM Fees: This fee is imposed when you withdraw cash from another bank’s ATM. Both the ATM operator and your bank might charge you with fees. 
    • Overdraft Fees: Withdrawing more money from your savings account than you actually have, incurs charges. Overdraft protection is typically absent from savings accounts, but some banks may permit the transaction to go through despite this, leaving a negative balance. In such circumstances, the bank charges an overdraft fee to make up for the shortfall in funds. This fee is usually levied per occurrence and can be quite hefty.
    • Account Closure Fee: Some banks may impose a fee if you choose to close your savings account within a specified period after opening. It’s important to understand this policy before initiating an account closure.
    • Miscellaneous Fees: This category covers various other fees that may be specific to certain banks or situations. Depending on the bank and account, there may be additional charges for services such as paper statements, wire transfers, stop payments, or returned deposited items.

    Types of savings accounts

    1. Basic Savings Accounts: These are regular savings accounts provided by banks and credit unions. They are a convenient way to deposit and withdraw money without hassle. These accounts usually have little to no monthly fees, and can allow you earn interest on your deposits.
    1. High-Yield Savings Accounts: High-yield savings accounts help you earn more interest on your savings than basic savings accounts. These accounts, often provided by online banks, offer competitive interest rates and may have certain requirements or minimum balance criteria. For example, Ally Bank, and Discover Bank. 
    1. Money Market Accounts (MMAs): Money market accounts combine features of savings and checking accounts. They provide the ability to earn higher interest rates on your savings while also offering limited check-writing and debit card access. MMAs typically require a higher minimum balance but offer additional flexibility. For example, Capital One 360, and TD Bank.
    1. Certificates of Deposit (CDs): They are deposit accounts where you can keep money for a set period of time, such as six months, a year, or more. They are a desirable option since they typically offer higher interest rates than savings accounts. It’s crucial to keep in mind though that once you put money into a CD, it’s locked in for the duration of the term. Withdrawing funds before the CD matures may result in penalties.
    1. Individual Retirement Accounts (IRAs): These are types of savings accounts used to hold retirement funds. These accounts are for the long term and frequently provide investment choices like stocks and mutual funds. Traditional and Roth IRAs are two options for retirement accounts, each with unique benefits and requirements.

    Read Also: Everything You Should Know About the Guaranteed Interest Account

    How to maximize savings accounts

    Maximizing your savings account requires a few key strategies. First, you need to create a budget to help you diligently save and allocate a portion of your income to your savings account each month. Consider it a regular expense, just like paying bills.

    After that, monitor your spending and look for areas where you can make savings. Small adjustments, like cutting back on unnecessary spending or looking for more affordable options, can add up to a lot over time. You can allocate more money to your savings account by paying attention to how you spend.

    Another effective approach is automating your savings. Establish a regular automatic transfer from your checking account to your savings account. By doing this, saving will become a regular and easy habit. It’s like having a financial assistant working in the background, making sure you consistently build your savings.

    Additionally, take advantage of savings account features that promote higher interest earnings. Research different banks or financial institutions to find ones that offer competitive interest rates on their savings accounts. High-yield savings accounts or online banks often provide better interest rates, allowing your money to grow faster. Lastly, avoid unnecessary fees and charges. Look for accounts that have minimal to no fees or consider switching to a more cost-effective option if necessary.

    Infinite banking

    Infinite Banking is a long-term strategy that maximizes your savings with careful planning and dedication. It entails using a whole life insurance policy to accumulate cash value over time as a savings vehicle, which could allow you to grow your savings more effectively than with traditional savings accounts.

    With a whole life insurance policy, you can take out loans against the cash value accrued in your policy. These loans can be used for various purposes, such as funding major purchases, investments, or even emergencies. By accessing policy loans instead of depleting your actual savings, you can continue to benefit from the growth potential of the cash value, while still utilizing the funds as needed.

    Additionally, whole life insurance policies used in infinite banking often offer the potential to earn dividends and guaranteed interest on the cash value. These earnings can further enhance the growth of your savings.


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