Understanding a Savings Account (Explained in Layman Terms)

Savings accounts come in a variety of terms and conditions and are offered with varying benefits depending on your specific bank. The primary function of a savings account is to gain interest while accumulating. Most basic savings accounts yield a relatively low amount of interest and pale in comparison to other interest bearing banking vehicles, but the access afforded to the accountholder makes a savings account a valuable and important deposit account to have.

A basic savings account can be opened separately or in conjunction with a checking account. Savings accounts that are attached to checking accounts are usually linked for the purpose of overdraft protection or some other symbiotic banking connection. Overdraft protection is a banking product that draws from the funds available in the savings account should any debit from a checking account exceed the amount of funds available in the savings account. For example: A customer who has $100 in their checking account and $100 in their savings account can link the savings account to the checking account for overdraft protection. If the customer writes a check for $120 or uses their debit card for a $120 purchase, the $20 that is necessary to fulfill the demand of that debit will be deducted from the savings account. Many times the overdraft protection will allow a debit to be completed that would have otherwise been rejected. In other cases, banks who charge fees for overdrawing an account will offer overdraft protection to enable customers to avoid those fees by establishing the service.

A customer can also set-up their savings and checking accounts to transfer funds on a scheduled interval. Customers who receive direct deposit payments can schedule a certain amount of their deposit to automatically be debited into their savings account. Not all banks offer the service but for those who do, customers can establish a worry-free mechanism for saving.

Other benefits of a savings account vary based on the terms and benefits offered by a particular bank. Consult your banks list of terms and conditions to understand the specific details of your savings account.

Rules that affect all savings accounts – regardless off the bank with which they are establish – are governed by Regulations of the Federal government. Regulation D limits the number of withdrawals from a savings account to 6 per month. The regulation is enforced to allow banks the ability to monitor holdings to ensure liquidity. By limiting the number of withdrawals per month, banks can have a better accounting of their assets and the limit forces customers into a more predictable and responsible banking behavior. 

Other savings accounts that offer more interest include Money Market Accounts. Money Market Accounts usually require higher minimum balances and higher initial deposits. The interest available through a MMA is usually several times what is offered for a basic savings account.

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