What is a savings account?

April 22nd, 2006

A savings account is a “near cash” account held by a customer at a bank, credit union, or savings and loan association. Money that is deposited into a savings account can not be accessed directly, but can be withdrawn for cash or easily transferred into a checking account where it can be accessed directly. A savings account is a good place to earn a little bit of extra interest over a checking account without losing the convenience of having liquid assets that can be accessed quickly and on demand.

Savings accounts work by depositing your money at your savings institution. The savings institution is then obligated to return your money to you upon demand. Some accounts have a clause requiring deposits to be kept for a minimum length of time, in which case the funds will not be available for a specified amount of time after you deposit it but then is available upon demand. The savings institution pays you for the time that you leave your money in your savings account by paying interest, which is normally a fixed percentage of the amount in your savings account on a regular basis such as daily, monthly or semi-annually. Your savings institution is then allowed to do whatever they want with your money while it is in the possession, such as grant loans and mortgages. Most banks and some credit unions carry insurance for your accounts which protects your deposits in the case of the bank going out of business or for any other reason when the bank would not have funds available to you to return your money.

A popular practice is to keep an online savings account at a company such as Emigrant Direct, HSBC, or ING. All three are currently offering over 4% interest in their savings accounts, compared to around 0.8% to 1% interest at your local brick and mortar bank. These online savings accounts can be linked to your local savings account or into your checking account, which allows for simple transfers of funds.

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