How to Open a Savings Account

All savings accounts are not created equally. Open one that will help you grow money safely.

If your financial to-do list includes building an emergency fund, saving for a short-term goal or simply relocating cash that’s been sitting in your checking account and not earning interest, then there’s no better time than now to consider setting up a savings account.

A savings account is a type of deposit account at a bank, credit union or other financial institution. This type of account is interest-bearing, meaning that the bank will pay you interest just for keeping your money deposited there. Though the amount of interest paid on deposits at many traditional financial institutions is small to modest -- much less than interest accrued from a certificate of deposit or a money market account -- many banks and credit unions are offering savings accounts yielding well above 4.00% APY.

Withdrawal limits exist for savings accounts, but these accounts provide more flexibility to access your cash than other savings accounts like CDs.

What to consider when opening a savings account

The best savings account depends on your individual financial needs and preferences. But generally, these are the factors to look out for:

Interest rate and APY

The higher the rate, the better. The interest rate tells you how much the bank will pay you for depositing your money with it, and the APY indicates the amount of interest you’ll earn on your balance over the course of a year if the interest is compounded.

The Federal Deposit Insurance Corporation, or FDIC, updates the average savings account APYs on its website on a regular basis. High-yield savings accounts offer APYs much higher than the average.

Alternatives to savings accounts, such as money market accounts and CDs may offer higher interest rates, but these accounts also come with drawbacks, such as higher minimum balance requirements or limitations on when you can withdraw your money.

Fees

Paying fees will surely diminish your savings potential. Even though they may seem insignificant by themselves, they can add up over time, and that can work against your savings goals. Banks may charge monthly maintenance and other fees, such as ATM, foreign exchange, account closing and overdraft fees. Some banks will even charge you a fee if your balance drops below a minimum threshold.

It’s best to avoid accounts with numerous fees. There are many banks and credit unions that offer savings accounts that don’t charge monthly fees or that offer rebates on out-of-network ATMs fees charged by third-party vendors. After all, every dollar that you avoid in fees will continue to grow with interest and add to your bottom line.

 
FDIC or NCUA coverage

Savings accounts at federally insured banks and credit unions are protected in the case of a bank failure for up to $250,000 per person, per institution by either the Federal Deposit Insurance Corporation or the National Credit Union Administration. Most experts suggest limiting your savings account balance to no more than the coverage maximums, in the event your bank files for bankruptcy.

 
Account accessibility

Access to a savings account will vary depending on the financial institution. Some banks are online-only and don’t offer physical branches. This works well if you’re comfortable banking in a completely digital environment, where 24/7 access to your account is available on a virtual basis.

Many of the biggest banks maintain a large number of bank branches throughout the country while offering mobile and online banking services using the latest technology. Such big banks as Capital One and Chase provide the convenience of online banking with the option to receive in-person assistance at a bank branch.

When researching a savings account, be sure to note what’s available via the bank’s mobile banking services, and how many surcharge-free ATMs the bank provides.

 
Minimum account opening balance

The minimum deposit is the amount of money you’ll need to fund your savings account. This varies between banks and can range from zero to $1,000 or more. Online banks usually have lower minimum thresholds as a result of lower overhead costs. Choose an account that has a minimum initial deposit requirement that matches the amount of cash you have on hand.

How to open a savings account

You can typically apply for a savings account online, over the phone, in person or by mail, depending on the bank or credit union. You’ll need to provide personal information and may need to fund your deposit when you open the account.

The bank will likely need your full name, date of birth, Social Security number, address and other contact information. Be prepared to present your government-issued ID (or scan a copy of it for online bank accounts). If you’re applying for a joint account, you’ll also need to prove the identity of the other applicant.

Can you be denied a savings account?

Unfortunately, yes. Your application to open a savings account can be denied if negative information appears on a ChexSystems or Early Warning Service report. Both are consumer reporting agencies that document your banking history.

The types of negative information that may appear on your report include overdrafts, accounts left with a negative balance or evidence of churning -- opening and closing accounts rapidly to collect new account bonuses. A bank or credit union may use negative information collected from any one of these reports to deny your application.

If your application has been rejected, the first thing you should do is contact the bank to find out why. Often, you may need to submit more personal information or it may be necessary to dispute inaccurate information returned by ChexSystems or Early Warning Service. If possible, correct the negative report by addressing any outstanding issues with accounts at other financial institutions before proceeding with a new application process.

Alternatives to a savings account
Certificate of deposit

A certificate of deposit, or CD, typically offers a higher interest rate than a savings account but locks your funds up for a set term. For example, you could buy a five-year CD and earn a higher interest rate than a typical savings account, but you can’t touch that money for five years without incurring an early withdrawal penalty.

The penalties require you to forfeit all or a portion of your interest earned and typically range from 90 to 365 days’ worth of interest, depending on the CD’s term length.

Money market accounts

A money market account falls between a CD and a savings account in terms of interest rates and liquidity. Money market accounts typically have a higher minimum balance than a standard savings account and may offer some check-writing privileges. However, a money market account may require a much higher initial deposit than a savings account and can impose monthly fees if your balance falls below a minimum requirement.

It’s also common for a money market account to limit the number of transactions to no more than six per month before an excessive withdrawal fee is imposed.

Savings bonds

Savings bonds, such as the Series I bond, are federal bonds offered through the US Treasury that are tied to inflation. The interest rates are variable and can adjust every six months. Because they’re backed by the government, I bonds are one of the safest investments you can make.

I bonds can’t be redeemed for the first 12 months and there’s a three-month interest penalty incurred when cashing out if you’ve purchased an I bond within five years. This savings option is better suited for a longer-term strategy.

The bottom line

Opening a savings account is a great way to grow your money while keeping it safe. Using a savings account to establish an emergency savings fund or reach a short-term goal is ideal because these accounts offer flexible access options and provide interest to help you accomplish your savings goals faster. Look for FDIC or NCUA coverage and the highest APY available while avoiding fees. Though savings accounts are an essential component of any savings strategy, there are additional types of savings accounts that offer different features to fit a variety of savings goals.