Free Savings Account: What Are Your Options?

Opening a Free Savings Account With No Minimum Balance

Free Savings Account On Internet TabletA common question among young people just getting started with “adulting,” or others trying to battle their way back from tough times financially is this: Can I actually open a savings account when I only have a little bit of savings?

Yes, you can open a savings account with little or no money, but finding a free savings account with few fees and a high return will require some research on your part.

First, you must understand that not all free savings accounts are created equally. Some savings accounts come with plenty of strings attached and you must make sure that your emergency fund isn’t being dramatically eaten into by fees and penalties for failing to meet minimum-balance requirements or exceeding withdrawal limitations.

The whole point of opening a savings account is to try and save as much of your money as often as possible. And if you can even grow those funds via some high-yield interest rates, then that’s even better.

If you fail to choose wisely when opening a savings account, you could see bank fees and minimum-balance requirements torpedo your savings gains.

Traditionally, free savings accounts can be established one of three ways:

  • Online banking institutions
  • Credit unions
  • Traditional banks.

All of them offer specific perks that might potentially fit customers, but there are also some drawbacks to consider. Individuals should study up on the three options and determine which works best for them prior to opening an account.

What Is a Savings Account?

A savings account is a place where you can store funds that you don’t need at the moment and those savings earn monthly interest based on the balance. A savings account is opened when you make a deposit with cash or a check. You can continue to contribute to that account as often as you like. The bank, be it an online operation, a credit union or a traditional bank, pays you interest on your monthly balance.

A savings account differs from a checking account in that you likely won’t be allowed to use those funds to write checks or make ATM withdrawals. Often, there are limits as to how often you are allowed to tap into those funds without being penalized.

In most instances, savings accounts are set up to allow customers to stash money away for specific goals such as buying a house, paying for schooling or financing the growth of your family.

Another very important use for a savings account is to have money stashed away as an emergency fund in a time of great need. Keeping a healthy amount of cash tucked away in a savings account could help to soften the sting of losing a job or taking the hit of unexpected medical or transportation expenses.

According to a survey conducted by the New York Times, the majority of Americans don’t have enough emergency savings to last three months in the event of a catastrophic event such as a job loss or an extended hospitalization. A whopping 77% of low-income households don’t have enough savings to last three months, while middle-income households (52%t) and upper-income households (25%) aren’t much better off in terms of having enough savings to last three months.

That’s especially relevant considering that 40 million people have either lost their jobs or had their hours severely cut back because of the shutdowns because of COVID-19.

Savings Accounts & Fees

Few banks offer savings accounts that are truly “free” and not subject to fees when certain requirements aren’t met. These fees can sometimes stall progress, negate the gains made by the interest collected and, occasionally, even cut into the principle of the savings account.

The good news is that most of these types of fees can be avoided as long as you meet certain conditions in using your account. Incidental fees, which come following specific services, can sometimes go unnoticed in the fine print of fee schedules and they can prove to be especially costly if they go unchecked for several months.

Some of the fees that people with savings accounts might encounter include:

  • Service charge fees. Many national banks, such as Bank of America, Chase Wells Fargo and others, have a $5 monthly service fee on savings accounts. You can avoid that by meeting requirements like $300 daily minimum balance or having a linked checking account or by being under the age of 18. Online banking and credit unions often don’t place minimum-balance requirements on savings accounts, allowing people to avoid being hit with fees that would undoubtedly cut into their progress.
  • Number of withdrawals/transfers. All savings accounts at depository institutions are required to abide by Regulation D, which states that you aren’t allowed to make more than six transfers or withdrawals a month.  If there are more than six, most banks and credit unions will charge a fee for each transaction above the threshold.
  • Minimum balance requirements and fees. Many high-profile traditional banks, such as Bank of America ($25), PNC Regular Savings ($25) and Chase ($25), have requirements as to how much money an individual must deposit to open a savings account.

The best way to avoid fees is to make sure you maintain the daily thresholds required by the bank, or find a no-fee bank account. Some banking institutions have accounts with no such daily and opening requirements, meaning individuals can start and maintain a savings account with as little as $1 in it.

What Are the Options?

To find a free savings account that works best for your needs, you will likely need to ask yourself important questions, like:

  • Do you need a physical banking branch or can your needs be handled online or through a phone app?
  • Do you also need a checking account to pair with the savings account so that you can use a debit card for daily functions and also have access to nearby ATMs? Also, are those ATM transactions fee free?
  • Will you be using mobile check deposit?

In 2020 here are some of the banking institutions that offer savings accounts with no minimum balance included: Citi Accelerate High Yield Savings, Ally Bank Online Savings, American Express High Yield Savings Account, Discover Online Savings Account, Marcus by Goldman Sachs High Yield Savings, Synchrony High Yield Savings, Barclays Online Savings Account and Capital One’s 360 Performance Savings.

Online Banks

Because they don’t have nearly the overhead cost of many traditional brick-and-mortar banks, online banks can usually offer much higher interest rates to an individual looking to open a savings account. For many of the same reasons, online banks tend to charge individuals with savings accounts fewer monthly service fees and often don’t require minimum starting and daily balances.

Also, because online banks don’t have brick-and-mortar facilities out in the community to advertise their brand, they tend to offer higher interest rates as an incentive to attract customers. If you are someone who doesn’t need a branch to conduct your banking business, online might be the way to go in order to maximize the gains on your savings account.

It’s actually quite easy to open an online free savings account with exceptional offerings. However, while online banks tend to offer the best interest rates, it’s always smart to look at in-person institutions in your community. After all, your needs might change depending on your place of residence, job and family demands.

Traditional Banks

If easy access to ATMs and bank branches is what is most important to you, then a traditional bank might be the best optionto open your savings account.

However, traditional banks often offer the lowest Annual Percentage Yields (APY) for savings accounts. They are able to do this because of their large volumes of customers and the fees that they charge them on a monthly basis. Also, many of these traditional brick-and-mortar facilities require minimum deposits to open a savings account. So, if you are looking to avoid fees and minimum-balance requirements and maximize their savings, do your homework on the strings attached before opening an account at a traditional banking facility.

Credit Unions

Credit Unions offer savings accounts with little-to-no fees and some offer higher Annual Percentage Yields — i.e., growth on your savings — than traditional banks.

Credit unions usually offer solid options because they are nonprofit organizations owned by the members. This differs greatly, of course, from the high-profile banking institutions that make their money off fees attached to most checking and savings accounts.

While you’ll likely come out much better financially in the long run by joining a credit union, you must remember that they often require memberships that demand a minimum deposit to get started. For some individuals, reaching this minimum deposit level might not be possible and disqualify them from using this option.

What to Look for in a Free Savings Account

Again, you must understand that not all free savings accounts with no minimum balance are created equally. Do your homework, read the fine print and go with the option that best suits your goals.

Here are some of the factors to consider when shopping around for a  free savings account :

  • Low/no fees. Some banks charge monthly fees that could be waived if specific requirements are met on the front end. Banks often charge clients fees for having less savings than the daily allowable minimum balance, and they also penalize individuals for making too many withdrawals and/or transfers. Often, online banking institutions and credit unions don’t charge these types of fees.
  • High APY. To maximize the potential returns on your savings, individuals should seek out high yield accounts. Shop around and compare the Average Percentage Yield  so that you can maximize your gains and grow your savings.
  • Low/no minimum deposits. Some financial institutions require a deposit of a certain amount (typically, $25) to open a savings account. If this is a financial hurdle that you might have trouble clearing, shop around to different institutions so that you can avoid having to plunk down a certain amount just to open a savings account.
  • Penalties for withdrawals/transfers. All savings accounts at “depository institutions’’ must adhere to Regulation D, meaning that you aren’t allowed to exceed more than six withdrawals in a month. While it might be necessary to dip into your savings accounts from time to time in an emergency situation, you want to make sure that you don’t exceed the six allowable withdrawals because you will be subject to penalties. Those fees — often charged by traditional banks and credit unions — could ultimately cut into the interest earned, and even your principal.

How to Get Started

Individuals must determine what is most important to them before opening a free savings account either online, at a credit union or with a traditional bank.

If conducting your banking online and through an app is easy and most convenient for you, working with an online bank is likely the way to go for you. Online institutions likely will give you the best opportunities to grow your savings because they can offer higher interest rates.

If you prefer having a brick-and-mortar facility to walk into so that you can discuss your options face-to-face with a banking professional, opening a savings account at a traditional bank might be the way to go.

If your place of employment or school offers deals at local institutions, you might want to consider opening your savings account at a credit union. However, keep in mind that these institutions often require membership and minimum deposits on the front end to open savings accounts there.

In the process of doing your homework about the various options, here is some terminology that you are going to want to familiarize yourself with before deciding where to open a savings account:

  • Minimum balance requirement. This is the smallest amount of funds that you must keep in the savings account to avoid being hit with a service fee by your banking institution.
  • Minimum deposit amount. Some banks require individuals to make an initial deposit amount to open a savings account.
  • Interest. This is the money that you will earn while keeping your savings deposited at a bank, be it an online bank, credit union or traditional bank.
  • Compound interest. This is a method of calculating interest over a period of time — usually done monthly or daily — after it is added to the principal. The more often that the interest is compounded, the more your savings will grow.
  • Interest rate. This is a level of interest that doesn’t take into account compounding.
  • APY. The Average Percentage Yield takes into account the effects of compounding your interest earned throughout the year. Rather than comparing interest rates, the APY is the best way to compare yields. The higher the APY is, the more gains you will make in terms of trying to grow your savings.

For more information about budgeting and saving money, consider speaking with a credit counselor.


Sources

Quart, A., Serkez, Y. (2020, April 23) Who Has Enough Cash To Get Through the Coronavirus Crisis? Retrieved from https://www.nytimes.com/interactive/2020/04/23/opinion/emergency-savings-coronavirus.html

 Moon, C. (2020, June 17) Savings Account Fees: What They Are and How Much They Cost. Retrieved from https://www.valuepenguin.com/banking/savings-account-fees