Grow Your Wealth

Savings Account 101: How it Works and Why You Need One

How does a savings account work? We’ve got you covered.

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If 2023 is the year you’ve decided you’re finally going to build some solid savings, you’ve come to the right place to learn how to get started.

Savings are one of the most important building blocks in fixing your financial health.

Having a solid emergency fund, if not anything else, allows you to grow your finances without being totally capsized by (inevitable) unexpected money mishaps. Beyond this, savings allow you to make big money moves like putting a deposit down on a house or buying a car.

First things first —understanding how a savings account works.

Let’s jump in.

How Does a Savings Account Work? | Understanding the Basics of a Savings Account

A savings account is a type of bank account that is designed to help individuals save money over time. It is typically offered by banks and other financial institutions. Unlike a checking account, which is mainly used for day-to-day transactions, a savings account's main purpose is to accumulate funds and earn interest.

When you open a savings account, you become a customer of the bank or financial institution. This means that you have a contractual relationship with them, and they are obligated to keep your money safe and secure.

One of the key features of a savings account is the ability to earn interest on the money you deposit. Interest is essentially the cost of borrowing money, and when you deposit money into a savings account, you are essentially lending your money to the bank. In return, the bank pays you interest on your deposit. The interest rate is typically measured as an annual percentage rate (APR) and can vary depending on the bank and the type of savings account.

How Does a Savings Account Work? | Different Types of Savings Accounts

There are plenty of savings accounts available for whatever your specific needs and preferences are. Some common types include regular savings accounts, high-yield savings accounts, money market accounts, and certificate of deposit (CD) accounts. Each has its own features and benefits, so it's important to choose one that aligns with your goals, and how much of a risk you’re willing to take with your savings.

A regular savings account is the most basic type of savings account. It typically offers a low-interest rate but provides easy access to your funds.

A high-yield savings account, on the other hand, offers a higher interest rate than a regular savings account. This means that your money can grow faster over time. However, high-yield savings accounts might have certain requirements, like maintaining a minimum balance or limiting the number of withdrawals you can make each month.

Money market accounts are another type of savings account that typically offers a higher interest rate than a regular savings account. These accounts often have a higher minimum balance requirement and may come with additional features like check-writing privileges.

Certificate of deposit (CD) accounts are savings accounts that require you to deposit a fixed amount of money for a specific period of time, known as the term. In return, the bank guarantees a fixed interest rate for the duration of the term.

PSA-- We’re not financial advisors. You should def do your own research, and maybe speak to a professional money person to find the right account for you.

It's also important to note that while savings accounts can help you grow your money, they are not designed for day-to-day transactions. That’s checking account territory.

How Does a Savings Account Work? | The Role of Banks and Financial Institutions

Unless you get off on the risk of the cash-in-a-sack-under-the-bed-vibe, a savings account is a safe place to store money, in terms of theft and loss.

A benefit of a savings account is your ability to access and manage it.

Many banks provide services such as direct deposit, allowing you to have your salaries or other income automatically deposited into your savings accounts. Banks also offer electronic transfers, enabling individuals to move money between different accounts or send funds to other people. These services make it convenient for individuals to save and manage their finances efficiently. More on how to increase your savings efficiency a little further down.

As much as we hate ‘em for a lot of other things (ahem, “overdraft protection”), banks do offer various safeguards and regulatory measures. They are required to stick to strict regulations and implement security measures to protect your funds. These measures include encryption technologies, fraud detection systems, and insurance coverage provided by regulatory bodies. By putting your savings in a trusted bank or financial institution, you can have peace of mind knowing that your money is safe and protected.

How Does a Savings Account Work? | Understanding Interest Rates

Interest rates are a key part of savings accounts. When you deposit money into a savings account, the bank can invest your money in other stuff (which is why you might want to look into ethical banking), and in return pays you interest on your balance. Interest is essentially the cost of borrowing money, and in the case of savings accounts, it is the reward you receive for keeping your money in the bank.

Interest rates are usually calculated as a percentage of your average daily balance and are usually compounded either daily, monthly, or annually. Compounding refers to the process of earning interest on both the initial deposit and the accumulated interest.

Already confused? Same. Dw, here’s an example... If you have $1,000 in your savings account with an annual interest rate of 2%, at the end of the year, you would earn $20 in interest. The following year, you would earn interest not only on the initial $1,000 but also on the $20 of interest earned in the previous year. Compound interest.

How Does a Savings Account Work? | Maximize Your Savings With AI

So now you have a little more of an understanding of how savings accounts work. But that’s just one step of the process. You can also maximize your savings before it even enters your account.

When you download Cleo for free, she’ll create you a personalized budget tailored to your specific spending habits. She’ll call you out on spend limits, so you can put even more money aside each month, and find even more savings opportunities with autosave.

To find out more, just type “autosave” into chat. Here’s a taster of what Cleo offers:

  • Set & Forget: Pick an amount up to $24 and Cleo will set it aside each week for you
  • Round Up: Cleo rounds up and sets aside the change from your spends each week
  • Smart Save: Cleo uses ✨ magical algorithms ✨ to set aside money each week
  • Swear Jar: Get "fined" when you spend at selected retailers (the fine goes into your Cleo Wallet each week)

To see what Cleo can do for your money, just click the button.

*Cleo Plus is our subscription service, which offers eligible users information on your credit score, and access to cash advances (”Cash Advance”). Advance amounts will vary based on eligibility. If you don’t want to subscribe, you can also apply for cash advance by contacting our customer service at team@meetcleo.com. To learn more about eligibility, repayment, and overall terms, please visit: meetcleo.com/terms.

Enjoy this post? Give it a share or send it along to a friend. You never know, it could make a big difference. Big love. Cleo 💙

If it’s an emergency and you need a quick spot with 0% interest, Cleo could cover you up to $250.* Then help you pay it back, with a personalized budget.

Still have questions? Find answers below.
What is a savings account?
What are the different types of savings accounts?
How do interest rates work in savings accounts?
How can I maximize my savings with AI?
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