Banking 101: How Does a Savings Account Work?

Do you remember getting your first piggy bank as a child? Did it have a stopper on the belly? Was it even shaped like a pig?

Growing up, one of the biggest lessons we’re taught is that saving is important. It starts out by putting quarters away in a piggy bank until you have enough for the toy or game you’ve been wanting. In adulthood, you use the same principles to set aside funds for larger financial goals like buying a house, taking a trip, or adding another member to your family. Only now, instead of a piggy bank, you use a savings account. But do you know how a savings account actually works?

To answer any questions you might have, we’ve put together all the facts you need to understand about savings accounts and how best to use them.

How Does a Savings Account Actually Work?

Like the name implies, savings accounts are designed to help you save. Sounds simple enough, right? Primarily, they do this by offering a guaranteed return on any funds you deposit into the account. For instance, if you were to put $100 into a savings account with a 1.5% annual interest rate, you would end up with $115 after a year. Since interest payments are usually broken up into monthly installments, every time you contribute to the account, you set yourself up for a bigger return in the long-run.

Another benefit of savings accounts is that they are federally insured for up to $250,000 if the bank happens to lose your money. As such, despite the fact that they have a relatively low rate of return, savings accounts are less risky than investing in the stock market—especially when there’s a potential recession on the horizon.

In order for a savings account to be effective at contributing to your financial goal, the money within it needs to be left alone. To help you with this, savings accounts often have rules and penalties that prevent you from easily spending your funds. These include:

• Transaction caps where you are only allowed to make a handful of payments from your savings account per month and are charged a fee if you go over that amount
• Transaction fees for any payments that are made from your savings account
• Overdraft penalties that charge you for spending more money than you have in the account

While these rules might feel tedious, they’re a blessing in disguise that should help you build a barrier between your disposable income and your savings.