Traditional savings account: What it is and how it works

If you’re just starting your savings journey, a traditional savings account might be the answer. Whether you’re looking to boost your emergency fund or save for a dream vacation, a traditional savings account can help you do just that. But before opening an account, it’s important to understand how this type of account works and how it compares to other options.

What is a Traditional Savings Account?

A traditional savings account is a deposit account offered by banks and credit unions that allows customers to deposit money, earn interest and withdraw funds when needed.

“These accounts are good for consumers looking to separate cash from day-to-day expenses and save for short-term goals like vacations or home improvements,” said Matt Steenson, head of consumer banking at PNC Bank. ”

Traditional savings accounts usually don’t have a lot of bells and whistles. That said, if you’re looking for a place to store your cash, there are certain features you should be aware of.

How do traditional savings accounts work?

Traditional savings accounts are offered by banks and credit unions and are insured by the Federal Deposit Insurance Corporation (FDIC). The FDIC protects these accounts up to $250,000 per depositor, per bank, per ownership class. If your money is with a credit union, it is backed by the National Credit Union Association (NCUA), up to the same limit.

Traditional savings accounts also earn interest, helping your savings grow faster. However, you may have to meet certain requirements to get the best rate.

Traditional Savings Accounts: Typical Interest Rates

Interest rates are generally on the rise. However, traditional savings accounts often have lower interest rates than money market accounts or certificates of deposit, Stimson said. For example, the current national average savings account interest rate is 0.43%, according to the Office for National Statistics. FDICwhile the money market and 1-year CD are 0.62% and 1.76% respectively.

Savings account interest is expressed in annual yield (APY). APY stands for effective annual rate of return, taking into account the effects of compound interest. This means that you can earn interest not only on the initial deposit amount (principal), but also on accrued interest from previous periods. Banks typically compound interest on savings accounts on a monthly or daily basis.

Traditional Savings Accounts: Typical Minimum Balances

Many savings accounts have minimum balance requirements to open an account. This minimum rate may also be required in order to obtain the highest advertised rate and/or to avoid fees. Some accounts may even be tiered, with the higher the balance the higher the interest rate.

Minimum balance requirements vary widely between different banks and accounts. However, traditional savings accounts tend to have lower or no minimum balance requirements. The trade-off is that they also have fewer perks and features.

Traditional Savings Accounts: Withdrawal Limits

Unlike checking accounts, banks generally discourage frequent withdrawals from savings accounts. “The goal of a savings account is to reduce the frequency of money transfers, which is to store money and let it grow,” said Jennifer White, senior director of banking and payments intelligence at JD Power.

Historically, in Rule D, requiring financial institutions to limit withdrawals and transfers from certain types of savings and money market accounts to a maximum of six per month. These limited transactions include pre-authorized or automatic transfers (such as setting up automatic bill pay from a savings account), online and mobile transactions, overdraft protection transfers, and more.

But in April 2020, amid economic concerns about the COVID-19 pandemic, the Fed announced an interim final rule to amend Regulation D, effectively removing the six-per-month limit. It’s worth noting that while the Fed no longer enforces these limits, individual banks and credit unions still have the option to set withdrawal limits or charge fees for excessive withdrawals from savings accounts.

Other Types of Savings Accounts

Traditional savings accounts aren’t your only option for storing money. There are many other savings tools with different functions:

• High Yield Savings Account: If you’re looking to maximize your interest income, a high-yield savings account is the way to go. These accounts work much like traditional savings accounts, except they offer higher APYs—up to 5.00% or more. Remember, depending on the account, you may need to maintain a larger balance to get the highest interest rate.
• money market account: Not to be confused with money market funds, money market accounts are another type of interest-bearing deposit account. “A money market account provides a combination of checking and savings features,” Stinson said. They typically have higher interest rates than traditional savings accounts and offer check-writing and debit card features, he explained. However, they may also require a higher minimum balance to avoid fees.
• Cash Management Account: This is a financial product that combines the functions of multiple account types into one. It often combines the services of checking accounts, savings accounts, and sometimes even investment accounts. They are often offered by brokerage firms and fintech companies rather than traditional banks and credit unions.
• Certificate of Deposit (CD): A CD is a term deposit account, which means you deposit a certain amount of money for a specified period of time (months to years) called a term. You can earn interest on the balance and get back the principal and interest income when the CD matures. Term deposits often offer higher interest rates than standard savings accounts due to the time investment. They may also have minimum opening deposits, ranging from a small amount to tens of thousands of dollars, depending on the bank and CD type.
• Professional Savings Account: These savings accounts are customized to meet specific financial goals or needs. For example, there are savings accounts designed to help people save for vacations or holidays. Banks automatically transfer funds from checking accounts to savings accounts on a regular basis, and then release the funds ahead of the holiday shopping season or summer vacation.

Pros and Cons of Traditional Savings Accounts

There are several benefits to having a traditional savings account — lower fees, lower minimum balance requirements, and interest on savings, to name a few. That said, there are some downsides to consider as well.

advantage:

• Security: Funds held in a traditional savings account at a federally insured bank or credit union can be protected up to $250,000. Plus, unlike stock market investing, you won’t lose any of your principal balance.
• fluidity: Savings accounts allow you to withdraw or transfer money with relative ease, so you can always access your money when you need it.
• interest: Even though interest rates may be lower, you’re still generally making more money than if you put it under your mattress or in a no-interest checking account.
• Low minimum balance or no minimum balance: Traditional savings accounts don’t usually require large minimum balances, so they’re fine for most people to use.

shortcoming:

• lower income: Traditional savings accounts (especially large brick-and-mortar banks) often offer lower interest rates compared to other investment options or even high-yield savings accounts at online banks. They are not great vehicles for growing wealth and achieving long-term savings goals. Kristen Beckstead, Vice President and Financial Planner, CFP, ChFC, First Horizon Advisors, said: “Traditional savings accounts are great for short-term goals, while investing and retirement accounts are more likely to be more profitable. High returns and some tax benefits in the future.”
• Limit transactions: Some banks limit the number of withdrawals or transfers you can make from your savings account each month. You may be charged a fee if you exceed the limit.
• Lack of features: Unlike more complex accounts or financial products, traditional savings accounts may not have additional features, benefits or rewards.

How to Open a Traditional Savings Account

JD Power customer data found that about seven in 10 existing bank customers currently have some kind of savings account, White said. If you want to join their ranks by opening a traditional savings account, it’s fairly easy.

“If you prefer face-to-face interaction, there are bank branches on almost every corner … make an appointment or just walk in and get help opening an account,” White said. “If you prefer to complete the process online, banks can offer new account opening services on their websites and often even in mobile apps.”

Whether you choose to open an account in person or online, there are just a few steps to follow:

1. Research Account Options: Start by comparing savings accounts offered by different banks or credit unions to find one that meets your needs. Compare features like rates, fees, minimum balance requirements, and customer service.
2. collect documents: To make the process smoother, make sure you have some key documents and details ready in advance. “You’ll need your primary identification, such as a driver’s license or passport, and your Social Security number or tax identification number to begin the account opening process,” advises Backstead. The bank may also require a utility bill, lease agreement or other proof of address in the form of official mail.
3. sign the application form: This can be done in person at a branch, online or sometimes over the phone. Make sure all the information you provide is complete and accurate, otherwise approval of your new account may be delayed.
4. Fund your account: Many banks require an initial deposit to open a savings account. You can usually fund your account by cash deposit (if depositing in person), transfer from another account, or by mailing a check.

takeout

Traditional savings accounts are a great way to get started for novice savers because they don’t require large balances or charge large fees.

That said, a traditional savings account might not always be the best choice, depending on your goals. For example, if you want to grow your savings as quickly as possible, you might prefer a high-yield savings account. Or, if you have a lot of savings set aside for a future goal, it might make sense to put it on CDs.

In other words, the type of account that’s best for your savings depends on your larger financial needs. “Assessing how easily you want to access your savings, and the degree of risk you want to take in growing your money, will help you decide which savings account type is best for you,” White said.