Savings Account

What It Means

A person who wants to put aside money and keep it in a safe place will often deposit these funds in a savings account at a bank or other financial institution. In the United States savings accounts are available at a number of financial institutions, including commercial banks, credit unions, and savings and loan associations. These establishments are usually insured, which means the money they hold will be protected if the institution somehow fails.

Financial institutions pay customers a fee called interest on the money they keep in savings accounts, and in this way savings accounts grow. The interest is calculated as a percentage of the amount of money in the account. For example, a deposit of $100 into a savings account that pays an annual interest rate of 4 percent would grow into $104 after one year. There is often no minimum dollar amount required to open a savings account, which makes it a practical and appealing option to many. Most individuals who participate in banking have a savings account, and some financial institutions require customers to have savings accounts before they can open other types of accounts.

A savings account is not the only way to keep money at a bank. Other deposit accounts include checking accounts, money market accounts, and certificates of deposit (CDs). Each kind has different features. Checking accounts, for instance, often do not generate interest but are more convenient for everyday use. CDs and money market accounts generally earn more interest than savings accounts, but they are more restrictive in allowing customers to access their money.

When Did It Begin

Historical records show that the first time people were paid interest for putting their money in banks was when the Bank of England was founded in 1694. The English, however, did not invent the idea of paying interest. The concept existed in Italian banking and Dutch lending systems, both of which influenced the development of banking in England.

The British government’s finances were in shambles in 1688, when King William III and Queen Mary II came into power in England. In addition, William was engaged in an expensive war with King Louis XIV of France. After William spent all of the money he had borrowed from merchants and goldsmiths, he asked his government, known as Parliament, to find a way to raise more money. Parliament passed a bill that allowed for the creation of a government-run institution called Governor and Company of the Bank of England. The bill allowed citizens of England to deposit their money in the newly formed bank, which then loaned this money to the English government (that is, King William). To reward citizens for loaning their money, the government offered the bank’s customers an 8 percent payment every year the money was loaned. For example, if someone loaned £100 to the bank, after one year the bank would reward him with £8 (8 percent of £100).

At first the bank was restricted to loaning money to the English government, and it was intended to be closed after the loan was repaid. The government, however, never paid off the loan, and the bank still operates today, as the Bank of England.

More Detailed Information

A savings account is the most common type of bank account in the United States. It is also often the first financial account a person will have; parents tend to establish savings accounts for their children in order to teach them the value of saving money and to educate them about how banking works. Once a savings account is set up, the account holder is usually given a passbook, a small book in which to keep track of transactions, including deposits, withdrawals, interest payments, and any fees that the bank charges. The first entry in the passbook is the opening deposit. The financial institution also sends a monthly statement that lists all transactions, and the account holder is responsible for checking the statement for accuracy in comparison with the passbook or register. This is known as reconciling an account. More recently, transactions and balances are kept track of electronically.

Although savings accounts are relatively uncomplicated, they do come with some restrictions. U.S. regulations allow savings account holders to make up to six transfers or withdrawals from their savings accounts per month (or within a the four-week cycle that appears on each statement). Only half of those six transfers or withdrawals can be made by check or debit card (a plastic card used to withdraw or electronically transfer funds from an account at the point of sale, such as at a supermarket checkout). The remaining three must be made in person at an automated teller machine (ATM) or bank branch. If a savings account holder does not follow this guideline, the bank may charge penalty fees, close the account, or reclassify it as a checking account.

Because of these regulations, most individuals in the United States have both savings and checking accounts. Checking accounts offer flexibility and accessibility of funds, and there are no restrictions on withdrawals or transfers. Many individuals thus use checking accounts for everyday purchases and paying bills and use savings accounts to save money and earn interest.

These federal guidelines were established to encourage U.S. citizens to save their money and to stabilize the money held by financial institutions. Although checking accounts are designed to fluctuate, banks prefer that savings accounts remain fairly predictable because they use the money in those accounts to make loans to other customers. For example, when a person borrows money from the bank to buy a house, the money loaned to that person often comes from other customers’ savings accounts. If the balances in savings accounts were to fluctuate too greatly, banks would not have a clear picture of how much money was available for loans. Lending money is how banks make most of their profits. Even though a bank pays annual interest to customers’ savings accounts, it will usually loan that money to other customers at a higher annual interest rate.

There is usually no minimum dollar amount required to open a savings account, but there may be various fees. For instance, once a savings account is opened, a bank may charge the customer a fee if the account balance falls under a certain amount. In some cases institutions will charge a fee just for having a savings account. Others may assess a fee for making certain kinds of withdrawals or for letting an account sit too long with no activity. In the United Kingdom and some other countries, a type of savings account known as a notice deposit account charges a fee if an account holder makes a withdrawal without providing a 90-day advance notice.

Putting money in a savings account is not the only way people can collect interest from a bank. They can also invest in CDs (certificates of deposit) and money market accounts. Traditional CDs offer higher interest rates than savings accounts, but after a CD is purchased, it cannot be cashed or have any funds withdrawn for a fixed period of time. Money market accounts are a type of savings account that have a higher minimum dollar requirement to open and often restrict access to funds.

Recent Trends

The Internet has changed the way people bank. Virtual banks, banks with no physical presence or a very limited one, offer online banking services to customers. Because such banks cost less to operate, they tend to offer higher interest rates than traditional banking institutions. In 2000, for example, an online bank called ING Direct, part of the Netherlands-based financial company ING Group, began offering customers savings accounts with attractive interest rates. ING Direct had fewer physical locations than traditional banks, so it was able to offer customers a higher interest rate on their savings accounts.

Although traditional savings accounts are probably not in danger of extinction, the onslaught of new types of accounts has given them increased competition. For instance, in the late twentieth century banks began offering checking accounts that paid interest at rates rivaling those of savings accounts. Many customers found this option appealing because their money was more accessible in a checking account.