How Does a Traditional Savings Account Work?

A savings account is a bank account where you can store money safely and watch it grow over time, thanks to interest. Everyone can benefit from having a savings account; they’re secure and reliable, and they make it easy to track progress toward specific financial goals.

But not all savings accounts are created equal. Traditional savings accounts from big banks and credit unions as well as local financial institutions have some advantages, such as in-person assistance, but they often don’t pay much interest and may even charge monthly fees.

Table of Contents

1. What is a traditional savings account?
   1. What can you use it for?
   2. How do you deposit and withdraw money?
   3. How is interest calculated?
2. Traditional vs. high-yield savings accounts
   1. Interest rate
   2. Fees
   3. Accessibility
3. Pros and cons
4. Is a traditional savings account right for you?

What is a traditional savings account?

A traditional savings account, also sometimes referred to as a regular savings account or, simply, a savings account, is a basic type of deposit account where you can deposit money for safekeeping. That money can grow over time through interest, and you can withdraw it as needed to cover big expenses.

While traditional savings accounts don’t typically pay much interest compared to certificates of deposit (CDs) and high-yield savings accounts, they’re reliable and available through banks and credit unions with local branches and ATMs. This makes it easy to withdraw and deposit money and get help from a bank representative face-to-face.

What can you use it for?

You can use a traditional savings account for a wide variety of savings goals, but chief among them is an emergency fund. If you face an unexpected expense, such as a high medical bill or car repair, an emergency fund helps avoid high-interest credit cards and personal loans.

Here are some other common savings goals:

• Vacations 
• Weddings
• Adoption or pregnancy
• House down payment
• Home renovations
• Car down payment

How do you deposit and withdraw money?

Depositing and withdrawing money is easy with a traditional savings account. During business hours, you can visit a local branch in person to make cash deposits or withdraw money. Many banks and credit unions also have drive-throughs, which may have more flexible hours.

In addition, your savings account may allow deposits and withdrawals at ATMs. Use your bank’s ATM finder to locate in-network ATMs that don’t charge fees.

If you have a checking account with the same bank, you can likely also transfer money online or via mobile app. That means you can receive your paycheck via direct deposit into a checking account and then transfer some or all of it over to your savings account. Likewise, you can move money from savings to checking when you’re ready to spend it via:

• Debit card
• Check
• Online payment
• Mobile wallet

Finally, you might be able to deposit and withdraw money from an external account (at another financial institution) electronically. Simply connect the external account, like a checking account at a local bank, and you can transfer money to and from the savings account.

Most of our clients use checking accounts for short-term expenses and avoid traditional savings accounts altogether.

Instead, we recommend a high-yield savings account for emergency funds or money not needed for one to three months. A HYSA maximizes interest while remaining highly accessible. Transfers between a HYSA and checking typically happen within one business day via ACH, making it easy to move cash quickly when an unexpected expense comes up.

How is interest calculated?

Calculating interest for a savings account is more complex than it might seem at first glance. That’s because banks typically use compound interest formulas to determine how much interest you receive.

The basic compound interest formula is:

A = P (1 + r/n)^nt

Where:

• A is the final amount of money in your account (the principal balance and the interest earned)
• P is the principal balance (the amount of money you initially deposit)
• r is the interest rate
• n is the frequency with which interest is applied per time period
• t is the number of time periods that pass by

The frequency by which interest is applied (compounded) can vary by bank. Some banks compound interest daily; others monthly; still others quarterly. The more frequently that interest is compounded, the faster your money will grow.

What this formula doesn’t capture is ongoing deposits and withdrawals. Throughout a set number of months, you may add more money to your account as you’re paid, but you may also take out some cash to pay for a weekend getaway or a car down payment. This makes things a little murkier.

The key thing to remember when choosing a savings account is the higher the annual percentage rate (APY), the faster your money will grow via compounding interest.

You can see how your initial deposit amount, ongoing contributions, and interest rate all impact how much money you earn using our savings account calculator.

Traditional vs. high-yield savings accounts

Traditional and high-yield savings accounts are, at their core, the same. They’re governed by the same regulations, and they serve the same purposes. We just separate savings accounts into these two separate designations based on their:

• Interest rates
• Fees
• Accessibility

Interest rate

The point of a high-yield savings account is that it earns significantly more interest than a traditional savings account. Some of the biggest banks, like Wells Fargo and Chase, offer a paltry 0.01% APY on their savings accounts. According to the Federal Reserve, the average interest rate on savings accounts is 0.40%.

The best high-yield savings accounts, by comparison, earn 3% to 4% APY, sometimes more. This can make a huge difference in how much you earn over time. To get an idea of what you could make with a high-yield savings account vs. a traditional account with the average 0.40% rate, plug some data points in to this high-yield savings account calculator.

Fees

Online banks with high-yield savings accounts typically don’t charge any fees. Because they have much lower overhead, they can afford to offer their accounts free of charge.

Bigger, more established banks with traditional savings accounts may charge monthly fees. Often, you can waive these fees easily by meeting a minimum balance requirement or transferring funds to the account every month, but this varies by bank.

Accessibility

You can usually open a traditional savings account at a brick-and-mortar bank in your community. That makes it easier to withdraw and deposit cash and get in-person help when you need it.

High-yield savings accounts are much more common with online-only banks. That makes managing your money more challenging if you routinely deal with cash, though electronic transfers and mobile check deposits work for many users.

Pros and cons

Pros

• FDIC or NCUA insurance

  Money in a savings account is federally insured by the Federal Deposit Insurance Corporation (FDIC) for banks or the National Credit Union Administration (NCUA) for credit unions. This means your money is safe even if the bank fails.
  While uncommon, it can happen. In 2023, Silicon Valley Bank failed, and the FDIC stepped in to protect consumers’ money, up to the limit. Usually, deposits are insured up to $250,000, but some banks and credit unions may offer additional protection.

• Ability to earn interest

  Traditional savings accounts allow your money to accrue interest. This is a better alternative to leaving all your money in a checking account (most do not earn interest) or hiding cash in your home.

• More liquid than CDs, bonds, and investments

  You’ll likely earn more by keeping money in a CD or government bond, but you have to leave that money untouched for a set number of months (or years). This can be problematic in an emergency, when you need that cash.
  Money tied up in investments, such as stock portfolios or real estate, is even harder to access.

• Easy to open

  Traditional savings accounts are easy to open. Most consumers qualify for a bank account, as long as they can meet any minimum balance requirements.

• In-person banking

  A reason to choose a traditional savings account over a high-yield savings account is in-person banking. Most banks and credit unions offering traditional savings accounts have physical locations in your community that you can visit for deposits, withdrawals, and general customer service.

Cons

• Low interest rates

  Traditional savings accounts may earn interest, but it’s not much at all. The average APY is 0.40%, but some of the biggest and most well-known banks pay only 0.01% APY. Instead, consider a high-yield savings account that pays 3% or more.

• Less liquid than checking accounts

  By design, you can’t spend money from savings as easily as a checking account, which typically comes with a debit card and checks to pay for goods and services on the spot. Some savings accounts also charge fees if you make more than six withdrawals in a month.

• Potential fees

  Some traditional savings accounts charge monthly maintenance fees. While many banks offer ways to waive the fees, you’re better off choosing a savings account (like a high-yield savings account) that doesn’t charge fees to begin with.

Is a traditional savings account right for you?

If you absolutely need in-person banking for regular deposits and withdrawals, or you prefer getting human help with your finances, a traditional savings account could make sense. However, you’re leaving money on the table by choosing a traditional account with a low APY.

Clients benefit from having accessible savings set aside for emergencies and short-term needs. We encourage clients to assign a purpose to every dollar, keeping monthly expenses in checking while setting aside funds for future needs like travel or major purchases.

This “bucketing” approach helps clarify when and how money will be used. Because emergencies still happen, we recommend keeping emergency funds in an accessible account, ideally a high-yield savings account, though a traditional savings account can still serve this role.

Instead, I recommend opening a high-yield savings account with an online bank. If you’re worried about accessing your account easily, you can open a checking account at a bank or credit union with local branches, then connect the two banks via your mobile app.

This will allow you to deposit money into your checking account, then transfer it over to the high-yield savings account, or move money from the savings account to your checking account when you need it to cover an expense.