What Is A Savings Account?

What is a savings account?

In general terms, a savings account is simply any method that helps you safely accumulate and store money.

As mentioned elsewhere, a child's first savings account will most likely be that old favorite, the piggy bank.

But in the context of the building blocks of financial literacy, when we're talking about what is a savings account, we're really talking about an official banking account.

In short, a savings account is simply an account offered and maintained by a bank or other financial institution for individuals to keep or build their savings.

The advantages of a savings account is that it helps you organize your savings, keep your money safe, and track and monitor your savings goals.

How a Savings Account Differs From Other Accounts

By definition, a savings account does not offer check writing services. Checking accounts are all about spending money, at least in terms of paying your bills. It's difficult to save money in a checking account when money is always being deposited and then spent.

A savings account usually pays interest, although in times of very low interest rates such as we find ourselves today, the interest paid on a savings account may be pretty paltry indeed.

Even in more normal times, the interest paid on a savings account will be lower than other deposit accounts such as money markets and Certificate of Deposits (CDs).

That's because a savings account is pretty much the easiest place to park your money. It's insured (FDIC insured in the United States), requires a much smaller minimum balance than a money market account, and unlike a CD (which also often requires a minimum amount), you can withdraw from it at any time without incurring any penalties.

Why Do Banks Offer Savings Accounts?

No explanation of What is a Savings Account is complete without explaining why a bank offers savings accounts in the first place, or how they benefit from your deposits.

A bank's deposit base is what funds a bank's ability to make loans. When you deposit money into a bank, you're essentially loaning your money to the bank. The bank in turn loans that money out at a higher interest rate than what they pay you.

Because CDs and money market accounts tend to be more stable (the minimum balance requirements of each and the set time period of the CD tends to attract longer term deposits), the banks are willing to pay higher interest rates than on a regular savings account.

The Difference Between Saving and Investing

One other thing - it's important as a parent to understand and then communicate to your child when discussing what is a savings account - that a savings account is not the same thing as investing.

Investing is using your money to buy ownership (in part or in whole) of some kind of actual business or some form of property that you can use to generate returns or rent (anything from a margarita machine to an apartment complex).

Savings, on the other hand, is just that. When you save money, and even young children can grasp this, you're "protecting" money. You're protecting it from spending and you're protecting it from the risks of investing.

When Do Kids Need Savings Accounts?

Ironically, as basic as it is, a traditional savings account might not be best choice for children until after they've grown up a bit and transitioned from allowance to earning their own money.

Savings accounts are great for when you have a short to mid term goal of purchasing something larger than just the latest toy. Maybe it's saving up for a school-sponsored trip, an expensive bike or musical instrument, or even that first car.

For kids, these can be major big ticket items, well beyond the scope of paying for them via allowance money. Most likely, it will require some form of at least a part time job or part time business.

And the money that your child is saving up is better off (and safer) FDIC insured at the local banking institution of your choosing than stuffed in a wallet or a dresser drawer somewhere.

But when you child is younger and his or her saving up and spending ambitions involve (forgive the stereotypes) the latest ponied princess or amply armed superhero, then the standard piggy bank will probably suffice.

But what about the money you're putting away for the child yourself - including regular monthly contributions, or birthday and holiday gifts from the relatives?

Perhaps you choose an educational savings account instead, or a custodial stock brokerage account such as ShareBuilder, or even a CD you keep rolling out.

In my opinion, all else being equal, these are all better choices in the early years because a traditional savings account is best used as a short term instrument, not a long term one.