Savings refers to the money that a person has left over after they subtract out their consumer spending from their disposable income over a given time period. Savings, therefore, represents a net surplus of funds for an individual or household after all expenses and obligations have been paid.
Savings are kept in the form of cash or cash equivalents (e.g. as bank deposits), which are exposed to no risk of loss but also come with correspondingly minimal returns. Savings can be grown through investing, which requires that the money be put at risk, however.
Savings comprise the amount of money left over after spending. People may save for various life goals or aspirations such as retirement, a child's college education, the down payment for a home or car, a vacation, or several other examples.
Savings may commonly be earmarked for emergencies. For example, Sasha’s monthly paycheck is $5,000. Expenses include a $1,300 rent payment, a $450 car payment, a $500 student loan payment, a $300 credit card payment, $250 for groceries, $75 for utilities, $75 for cellphone service, and $100 for gas. Since Sasha's monthly income is $5,000 and monthly expenses are $3,050, there is $1,950 left over as savings. If Sasha saves maintains this excess as savings and later faces an emergency, there will be some money to live on while resolving the issue.
There are different types of savings accounts offered by banks that come with different features or limitations. Note that all bank savings vehicles come with federal deposit insurance (FDIC) of up to $250,000 per depositor per institution.
A savings account pays interest on cash not needed for daily expenses but available for an emergency. Deposits and withdrawals are made online, by phone, mail, or at a physical bank branch or ATM. Interest rates on savings accounts tend to be low but are often higher than on checking accounts. The best savings accounts can usually be found online because they'll pay a higher interest rate. Online-only accounts may be examples of high-yield savings accounts, which can offer as much as 20-25x higher interest on deposits than the national average.
A checking account offers the ability to write checks or use debit cards that draw from your account. A checking account pays lower interest rates than other bank accounts, and many of them credit no interest at all to checking customers. In return, however, account holders get highly liquid and accessible funds often with low or no monthly fees.
A money market account (MMA) is an interest-bearing account at a bank or credit union (not to be confused with a money market mutual fund). MMAs often pay a higher interest rate than regular passbook savings accounts and also include check writing and debit card privileges. These also can come with restrictions that make them less flexible than a regular checking account.
A certificate of deposit (CD) limits access to cash for a certain period in exchange for a higher interest rate. Deposit terms range from three months to five years; the longer the term, the higher the interest rate. CDs have early withdrawal penalties that can erase interest earned, so it is best to keep the money in the CD for the entire term. Shopping around for the best CD rate is critical if you want to maximize your investment.
