While checking accounts remain the most popular type of account offered by today's financial institutions, savings accounts are a close second. Savings accounts are popular because of their relative safety. They have a few key requirements and unique methods of working that are important to understand when opening an account.
Minimum Balance Requirements and Monthly Fee Avoidance
Most savings accounts require a minimum deposit in order to be opened, with many banks requiring anywhere from $25 to $2,500 based on their institutional guidelines. Most customers simply transfer the money instantly from an existing checking account, or they write a check from an external bank's account that is then deposited within 24 hours. At that time, the account is opened. In order to enjoy robust financial growth, however, customers need to consider the account's fee schedule and opportunity to enact regular transfers into the account.
While some banks and credit unions offer totally free savings accounts that come with no monthly fee, most banks will charge at least a small amount for their savings account. This fee can often be avoided by maintaining an average daily balance of at least $250, though the amount varies between institutions. Simply put, this means the account's balance cannot drop below $250, on average, each month. It may fall below the $250 threshold for one day or even two, but a sustained period below that threshold will cause the fee to be triggered.
Maintaining an average daily balance above the proper level is pretty easy, especially with regular transfers into the account. Many savings account-holders simply schedule weekly transfers from their checking account to the savings account, all of which can be done automatically and without further intervention. Others split their direct deposit so that a certain, smaller percentage of their regular pay goes into the savings account while the majority of their paycheck is placed into their checking account.
Safe from Fire, Loss, and Investment-Related Gambles
The savings account interest rate offered by the bank is a flat, fixed rate that has very little to do with the broader stock market. The growth of any funds placed in the account is not tied to stocks, bonds, mutual funds, or other investment mechanisms. This means even a bad day on Wall Street won't affect the money's ability to continue to grow. Better yet, savings accounts are insured for up to $250,000 against total loss if a bank goes out of business.
Savings accounts engage in something known as "compounding daily interest," which allows money to grow based on the flat interest rate associated with the account. That means money will earn interest every day, which will be applied to the account balance. The next day, interest accrues on both the original money deposited into the savings account and any interest that has been added to the balance. Over time, this compounding interest functionality dramatically raises the savings account balance
Savings accounts are insulated from stock market fluctuations, but still manage to earn compounding interest that grows a banking customer's investment over time. Thanks to automatic transfers and FDIC account insurance, these accounts can grow, flourish, and keep money safe for years.
