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Savings Accounts: What They Are and How They Work

Savings Accounts: What They Are and How They Work

Jenius Bank Team4/12/2023 • Updated 3/19/2025
Grey-haired woman looking at a pig-shaped piggy bank.
Piggy banks may be cute, but they don’t have a very good rate. A savings account tends to be a safer place to store your money. Savings accounts are designed to help you reach your financial goals. Though they’re often opened alongside checking accounts at banks, the accounts work differently. To make the most of your savings account, it’s helpful to understand how they work, how they differ from checking accounts, and what options exist to help build your savings faster.

Key Takeaways

  • Having a savings account could help you build wealth, protect your money, and maintain emergency funds, while also earning interest.
  • Rates on savings accounts depend on several factors, like the account type and compounding frequency.
  • When choosing a savings account, it's important to consider things like fees, minimum balance requirements, and transfer limits.

What Is a Savings Account and How Does It Work?

Savings accounts are a type of deposit account offered by banks, credit unions, and other financial institutions and are designed to help you set money aside. These accounts earn interest (expressed as Annual Percentage Yield or APY), helping you increase your savings in the long run.Many people use these accounts to save for specific goals, anything from a down payment on a home to an emergency fund for unexpected costs. Some people choose to open different savings accounts for different goals. When you’re ready to use your savings, withdraw or transfer what you need out of the account. Unlike checking accounts, which are primarily used for making purchases and other transactions, savings accounts may have withdrawal limits and could charge a fee if you take funds out beyond those limits.

Savings Accounts Earn Compound Interest

One of the main ways savings accounts help grow your wealth is through compound interest. Compounding refers to how interest is earned: it’s the act of earning interest on both the original principal and past interest accrued. Essentially, you’re earning interest on interest. The compounding frequency depends on the account type and institution. Most saving accounts have variable rates, meaning the institution may move the rate up or down depending on market conditions.

Types of Savings Accounts

There are several types of saving accounts you could use to reach your goals. Each type works in slightly different ways, so one account may be better for your needs than another. Here’s a quick overview.
  • Traditional savings accounts: These accounts are what most people think of when they hear the term ‘savings account.’ They’re available through most financial institutions and give you a place to set money aside. But they tend to have very low APY rates, so your money may grow slowly.1
  • High-yield savings accounts (HYSA): High-yield saving accounts have higher APYs than traditional savings accounts. These accounts are often available through online banks that may offer higher rates than traditional banks.
  • Certificates of Deposit (CDs): CDs are a type of deposit account with strict withdrawal limits. Most require that you deposit a specific amount of money in the account and keep it there for a set time, often between one and five years. The APY on these accounts is usually fixed, making your earnings more predictable.2
  • Money market accounts: Money market accounts typically offer higher rates than traditional saving accounts, but lower rates than high-yield accounts or CDs. They also often let you write checks from the account.3
Any of these account types could help you reach your financial goals and using a combination may help you take advantage of different benefits and rates.

How to Choose a Savings Account

Even if you’ve had a savings account for years, you may want to look for a new account if you feel like you aren’t getting the most bang for your buck. When choosing a savings account, it is important to watch for the following:4
  • Fees (minimum balance, excess transfer, etc.)
  • Minimum balance requirements
  • Transfer limits
  • Withdrawal limits
  • Tiered rates depending on how much you put in the account
Regardless of the account you choose, you want to make sure the account is FDIC-insured. This protects your account for up to $250,000 per depositor, per account ownership type, per institution in the event the financial institution fails. Consider what you’re saving for and how often you need to access the funds in your savings account. If you’re saving for a long-term goal, a higher rate account with withdrawal restrictions like a CD may be a good choice. But if you’re saving for a short-term goal, opening a high-yield savings account that has more flexibility may be a better fit.

How Much Should You Keep in Your Account?

The exact amount you want to keep in your savings account depends on your financial goals. Financial experts recommend having three to six months' worth of living expenses saved in an emergency fund.5 Beyond that, it's up to you to decide how much you want to save for different goals such as a down payment on a house or a dream vacation.Whatever amount you choose, build your savings into your budget and make a plan to set money aside on a regular basis. You don’t have to contribute tons in the beginning. For example, setting aside $300 each month in a HYSA with a rate of 5.25% APY could result in approximately $3,688 by the end of the year.6 (Assuming, of course, you don’t make any withdrawals in that year!)

Final Thoughts

A savings account is an important part of helping you to achieve financial stability and reach your financial goals. It provides a secure place to store your money, earn interest, and access funds in case of emergencies. When comparing saving account options, be sure to look for things like favorable rates, low (or no) fees, and FDIC insurance.At Jenius Bank, we want to support your goals. Learn more about Jenius Savings and start putting a savings plan together.

Savings Accounts Q&A

How much should you keep in your savings account?

The amount you keep in your savings account depends on your financial goals and personal circumstances. Financial wellness experts recommend creating an emergency fund with three to six months’ worth of essential expenses. So, that may be a great initial target. Beyond that, your savings goals depend on your life goals, whether that’s going on vacation, buying a house, or retiring early.

Does opening a savings account affect your credit score?

No, opening a savings account does not affect your credit score. Savings accounts are not credit products and don’t involve borrowing money. Therefore, they don’t show up on your credit report, and opening one won’t affect your credit score.

How much does a savings account cost?

Savings accounts may have monthly maintenance fees or other fees, depending on the bank and account type. However, many banks offer fee-free savings accounts, so it's a good idea to shop around to find an account that meets your needs and fits your budget.

Can I have more than one savings account?

Yes! There’s no set limit on the number of savings accounts you may have. Some financial institutions may have internal limits, but you could also open savings accounts at multiple banks. The number of savings accounts you need depends on your financial goals and needs.

What is the difference between a checking and savings account?

A checking account is designed for everyday transactions such as paying bills, making purchases, and withdrawing cash. It typically offers a lower rate and may have fewer restrictions on withdrawals.A savings account, on the other hand, is designed for long-term savings and earning interest. It may have higher rates but may also have restrictions on withdrawals to encourage saving.
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