Savings accounts are the bedrock of every working class adults out there. This is because it is designed to encourage the average working adult to put aside money in case of a rainy day. If you are trying to open one, it is important you know how savings accounts work so as to choose the right one.
Out of the well known types of bank accounts, savings accounts rank up there. This is because the account is structured to help you meet savings goals. This is regardless of whether these goals are short-term or long-term.
What Is A Savings Account?
A savings account is an account designed to earn you interest on savings. According to the Federal Deposit Insurance Corporation, the 2025 national average interest rate on savings account is 0.41%. This is the amount any money put on a savings account will generate.
Two notable features of savings account are:
- They do not come with a debit card or a check book.
- Having one does not make you eligible for a credit card.
Additionally, each bank has different savings account rules. While most banks will not charge you a fee to maintain an account, some want you to maintain a minimum monthly deposit to avoid fees. Personally, I recommend going for a savings account with no monthly fee.
Why is this important, my good reader?
Well, it does not make sense to have a bank eat deeply into your savings with fees. This is especially for something it has not worked for. I do not know about you, but it surely pisses me off when a single cent of my hard-earned money is deducted as a result of avoidable bank’s fees.
Speaking of savings accounts, different banks offer different savings accounts. Not all savings accounts generate a national average interest rate of 0.41%. Nowadays, online banks offer competitive interest rates of up to 4.83% on their accounts to compete with traditional brick and mortar banks.
Types Of Savings Accounts
There are four types of savings accounts. Some banks in the US tend to have a variation of these, but they still fall within these four groups below:
1. Regular Savings account
The regular savings account is what most traditional banks with physical locations offer. It is the traditional bank savings account your bank gives you, when you open an account. You know, the one with the insignificant interest rate of 0.41%, which barely makes a difference whenever you put money in the account.
A regular savings account is good, when you are saving for short-term and long-term goals. What do I mean by short-term and long-term goals, my dear reader?
Saving for a short-term goal like an emergency fund and a long term goal like saving for a home, can both be done using this type of savings account. This is especially, when you are not worried about the interest. This is because the interest rate on this traditional savings account is so low, you will barely notice any difference in your savings.
If you are looking for an account that will give you a substantial capital appreciation, it is the next type of savings account. Here is what you need to know about it below.
2. High Interest Savings Account
In the last decade, this type of bank account has been on a rage. It is also called a high yield savings account. How do high interest savings accounts work?
A high yield savings account is a type of savings account, which offers interest rates higher than the traditional savings rate of 0.41%. Usually, its competitive rates dwarf the ones offered by traditional banks significantly. Some banks offer up to 4.83% in interest rates!
Can you believe that?
You can read 7 best high interest savings accounts to beat inflation, to see the competitive rates offered by this type of savings accounts.
Just like the traditional savings accounts offered by brick and mortar banks, high yield interest accounts are insured by FDIC. The insurance is up to $250,000. What this means, is you will get up to this amount back in case the bank goes bankrupt with savings of that amount or more.
The cons to this savings account is there may be no physical branch to access. This is because this type of savings account is offered by online banks. It is how they attract customers, so as to compete with the traditional banks.
3. Money Market Account
A money market account is a savings account which lets you save and withdraw your money anytime. You enjoy the benefits of a checking account and a savings account having this type of account. Simply put, you will have a debit card and a check book.
In addition, a money market account offers an interest rate of 0.64%. This is according to the FDIC National Rate for 2025. The interest rate is higher than a regular savings account, but it is not fixed. You may need higher account balance to earn more interest in the account.
Finally, a money market account is offered by traditional banks, online bank and credit unions. Often, you may be required to be pay a monthly fee to maintain an account. Also, some banks may want you to put down a higher minimum deposit to open an account.
4. CD Accounts
CD accounts, also known as certificate of deposit, are for anyone trying to put money away that is not needed. Banks let you give them the money for a period of time and a fixed interest rate. Until the agreed time matures, you are not to withdraw the money.
What happens when you withdraw from a CD account before maturity?
You will incur a penalty fee. Banks will charge you for breaking the terms of a CD account. So, be sure you do not need the money before putting it in a CD account. Do not forget to read the terms and conditions before signing away your money to the bank.
I have attached a table below with a record of the current rates on CD accounts.
| Certificate Of Deposit Hold Time | 2025 National Interest Rate (%) |
|---|---|
| 1 month | 0.22 |
| 3 Months | 1.45 |
| 6 Months | 1.63 |
| 12 Months | 1.80 |
| 24 Months | 1.45 |
| 36 Months | 1.31 |
| 48 Months | 1.23 |
| 60 Months | 1.31 |
As of February 2025, these are the average national rates for this type of savings account. It may be vary from bank to bank. Be sure to compare the rates amongst banks. This is because there are competitive CD rates out there. You can read about how CD accounts work.
Speaking of rates, let us talk about how savings account interest rates works. Here is what you need to know below.
How Do Savings Accounts Interest Work?
How does interest work in a savings account, gracious reader?
Let us say a savings account interest rate is 0.38% APY, what this means is your savings will yield 0.38% capital appreciation every year. Some banks may offer dividend rates on certificate of deposit accounts, besides the annual percentage yield. These dividend rates are paid monthly.
Having mentioned that, how is savings account interest calculated?
Let us assume you have a high interest savings account that pays you 4.50% APY on a savings amount of $4000. You can get your annual capital appreciation by multiplying 4.50 by 4000 and divide the answer by 100. In this case, you have (4.50 * $4000)/100, which equals $180.
$180 is what your capital appreciation would be on $4000 on a savings account which pays an interest rate of 4.50%. This is how you calculate a savings account interest. Do you understand how savings accounts interest work now?
Savings Account Withdrawal Limits
Savings accounts have regulations on withdrawals. You are only permitted six withdrawals per month. Most banks will charge you a penalty fee, whenever you exceed this number of withdrawals.
Withdrawing money from savings account, especially a regular savings account, is kept below six withdrawals monthly. I recommend you read a bank’s terms and conditions, before opening a bank account. It will help you avoid monthly fees as a result of a violation of this sort.
Savings Account Pros and Cons
I am sure by now, you can ascertain the pros and cons of a savings account from this article. But, I am still going to give you a summarized table of the pros and cons of savings accounts.
| Pros of a savings account | Cons of a savings account |
|---|---|
| Easy to set up, since it requires little or no money | No debit card, No check book |
| Generates an interest on savings | Interest rate is too low on regular savings accounts |
| FDIC insured | Might charge monthly fees or minimum deposit |
| Best for short and long term needs | Up to 6 withdrawals per month |
As I previously explained, the pros and cons of savings account differ from bank to bank. This is because each bank offers a competitive advantage over its competitors. This is why I recommend you always compare banks before going to one. It will help you tailor your search to a bank which will meet your savings goals and needs.
Opening A Savings Account
With all I have explained here, I am sure you have a grasp of how savings accounts work. You can read What To Look For When Choosing A Bank for things to consider when looking for the right bank for you. Here are what you need to open a savings account.
- Driver’s license
- Social security
- A bill document containing your legal address. Some banks may ask for it, to ensure you live in the location you say. Other banks may not care.
- Contact information including next of kin(beneficiaries information)
- The amount you want to open your savings account with.
Most banks will ask all of these to set up a savings account for you. Be sure to update your mailing address each time you move, since banks would want to mail you monthly bank statements. You can always opt in for a paperless statement delivery to your email address, if you are all about saving the planet.
To conclude this article, the bank you choose will make or break you. I sincerely believe it, because a bank account can become a financial burden due to fees. This is why you should know how savings accounts work before going to open one or any other kind of bank account for that matter. It is how you avert unnecessary bank fees in the future.
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