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What is a Savings Account?

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Before we start our quest, we must first understand the different common terms used when your on your way to FINANCIAL FREEDOM! lets start with savings. What is savings? what is a savings account?

A savings account typically refers to an account in which one places money to earn a small amount of interest. Unlike a 401k or an IRA, the savings account funds are usually easily accessible, though some banks do charge for withdrawing money early. In most cases, people can withdraw money from a savings account at any time, at least at any time the bank is open, or one has access to the bank’s ATM.

The term "bank" is used here loosely. Not only banks, but also credit unions, and money market funds companies can offer a savings account to customers. In addition to earning interest on your deposits, the savings account also provides a safe place to put your money, far better than stowing it in the mattress or the cookie jar.

If the bank declares bankruptcy, is the target of embezzlement or mismanagement of funds, the Federal Deposit Insurance Corporation (FDIC) insures your account, up to 100,000 US dollars (USD). In fact, a requirement when shopping for a savings account is to look for one that is FDIC insured. If your savings account isn’t FDIC insured, you might have difficulty if the bank encounters financial problems. Most banks, credit unions and money markets funds do offer this insurance.

You also need to shop around for a savings account that offers the best interest rates. In the past, it was often the case that banks offered a slightly higher interest rate than did credit unions. This is because credit unions attempt to confer lower interest rates than bank rates to their customers borrowing money. Now sometimes credit unions are quite competitive in rates. Money market funds tend to be the most changeable in rates. Rates earned will depend upon the stock market, so they can be very high at some times and low at others.

Many people wonder how a savings account works and is profitable to the bank or other financial institution. The simple explanation is that you are actually lending your money to the financial institution. In return for this loan, the bank offers you part of the interest rate they charge customers. Thus the bank makes a profit and you make a profit on any money in a savings account.

Sometimes people might use an interest checking account instead of a savings account. If you really plan not to spend your money for a few months, it makes sense to use a savings account instead. Interest checking accounts pay much less interest than does a savings account, and normally require maintaining a high minimum balance, about 1000 USD. If this balance is not maintained, the checking account may actually charge you bank fees for your use of the account, which nullifies any potential interest earned.

Most savings accounts require a minimum deposit, usually 100 USD. An exception exists for children, who often have a savings account as their first bank account. Banks are very accommodating to children who wish to open a savings account because it is a way to build its future base of customers. Usually kids can open a savings account with about 5 USD.

The high competition for your temporary loan to banks mean you should shop around prior to choosing a savings account. Some companies will offer terrific incentives. In 2007 Ameritrade began offering a money market savings account, that if kept open for a year would pay a 100 USD bonus at the end of the first year. Money expert Suze Orman, who normally doesn’t endorse specific products, touted this as one of the best offers available to people who want to save their money.


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