What is a Savings Account? - Definition & Types

Lesson Transcript
Instructor: Paul Mckinney

Paul has been in higher education for 17 years. He has a master's degree and is earning his PhD in Community College Leadership.

A savings account is a bank account for saving money, that can also earn interest at the same time, increasing one's profits. Learn more about savings accounts, how they started, the different types and their definitions, and the reason people choose to invest in such an account. Updated: 10/13/2021

What Is a Savings Account?

You can use a savings account as an account to save your money and earn interest on it at the same time. Savings accounts are the least profitable type of short-term investments. Though they are simple, liquid, and easily accessible, they offer low yields. Most savings accounts do not even keep up with inflation, so you might not want to use them to store money over long periods of time.

The state of the economy and the federal funds rate are the two biggest factors that affect savings account interest rates. Savings account interest rates have been dropping since the late 1980s. Here's a chart showing some examples of how these rates have changed over the past decades:

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  • 0:00 What Is a Savings Account?
  • 0:43 History of the Savings Account
  • 1:29 Types of Savings Accounts
  • 2:35 Why People Invest in…
  • 3:25 Lesson Summary
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Savings Account Rate History

History of the Savings Account

The savings account started in Europe during the 1500s. Holland was a financial hub for shipping and trading at the time. People had lots of cash and needed a safe and secure place to store it. Cashiers starting providing a means to securely store money for people for a small fee. Back then, savings accounts did not pay interest like they do today.

The idea eventually spread throughout Europe, then to America through English colonies. The idea of a financial institution developed in Europe as early as the 18th century. Along with the idea of cashiers, these new financial institutions also provided loans and financial advice to the population, regardless of social class.

Types of Savings Accounts

There are three common types of savings accounts, which are traditional savings accounts, certificates of deposit, and money market funds.

A traditional savings account is an account held at a bank or credit union. People are allowed to deposit funds into the account and earn a small amount of interest. The funds can be withdrawn quickly and easily when needed by the customer.

Certificates of deposit (CD) are a very common type of short-term investment that is available to anyone. After making a deposit into a CD, the person agrees not to withdraw it for a specific period of time, in return for a higher yield. CD lengths range from three months to as long as five years. CDs are federally insured, so they are one of the safest types of short-term investments.

Money market funds are typically liquid savings accounts that offer a better yield. Money market funds are not federally insured, unlike the traditional savings account. This makes money market funds a higher-risk vehicle for short-term savings.

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