What is a savings account?

In a nutshell

A savings account is a type of bank account that lets you store money you plan to save for any length of time, including long-term.

• Unlike checking accounts, which let you make purchases with paper checks or debit cards, savings accounts typically only let you access your funds through bank withdrawals.
• Savings accounts are built to pay interest on your deposits, which can help your savings grow over time.
• According to the Federal Deposit Insurance Corporation (FDIC), the average savings account paid just 0.47% as of January 2024.

Why you should have a savings account

Having a savings account is a smart move if you want to get into a position where you are no longer living paycheck-to-paycheck. After all, having only a checking account — or no bank account at all — makes it easier to spend all your extra cash.

A dedicated savings account gives you a place to transfer excess funds, whether you want to make money transfers when you can afford to save or you set up automatic transfers on payday or a specific day of the month.

Because savings accounts keep your money safe thanks to FDIC insurance and because your cash stays fully liquid and easy to access, savings accounts are good for short-term savings, long-term savings, and even an emergency fund.

How do savings accounts work?

Savings accounts can be easily opened with various financial institutions, including traditional banks, web-based banks, neobanks, and credit unions. These accounts work similarly to a checking account, but unlike checking accounts, there may be restrictions on the number of withdrawals you can make monthly.

• Money in a savings account typically earns interest, although rates can vary dramatically based on the institution you use.
• While some savings accounts let you access your money at a brick-and-mortar location, others may only let you move your money electronically to another account.
• Some banks set limits on how often you can make free withdrawals from your savings account each month.
• Most savings accounts come with FDIC insurance that protects up to $250,000 per depositor. This complimentary insurance can reimburse you if your financial institution goes out of business.

Savings account pros and cons

There are many types of financial products to consider, and savings accounts are just one of them. With that in mind, it makes sense to consider the advantages and disadvantages of using a savings account over other options.

Savings account pros

• Savings accounts give you a place to store money you’re not using. If you keep your extra money in a checking account or in cash, you may be more tempted to spend it.
• Most savings accounts come with FDIC insurance. This insurance keeps your savings safe from bank failures while making it more useful than if you kept it under your mattress.
• You can earn interest on your deposits. Interest paid on savings accounts can help your money grow over time. (This is another reason not to store it under your mattress.)
• Many savings accounts come with no fees. The best savings accounts let you build your savings without any added fees.
• A savings account can help you begin saving toward your financial goals. You can open multiple savings accounts if you want to, and each one can be used for a different purpose.

Savings account cons

• Savings accounts aren't best for making purchases. You won't get a debit card or checks you can use for purchases like you would with a checking account.
• Interest rates are low, at least for now. The average savings account is earning just 0.47%, according to the FDIC.
• Some financial products can help you secure a higher rate of return. You may be able to boost your earnings if you go with an alternative account, such as a Certificate of Deposit (CD) or a money market account.
• You may need to maintain a minimum balance to avoid banking fees. Some banks require you to keep a minimum balance in order to avoid monthly maintenance fees.
• Your money is kept liquid where you may be tempted to spend it. Cash in a savings account may be too easy to access, especially when you compare it to products that keep your money tied up such as a Certificate of Deposit (CD).

How much should you save?

How much you should save depends on the goal of your specific savings account and how you plan to use the funds later on. For example, most experts suggest keeping three to six months of expenses in savings for emergencies, so that's a good goal to shoot for if you plan to open a savings account to store your emergency fund. If your family spends $3,500 per month on fixed expenses, regular bills, and groceries, for example, striving to save $10,500 to $21,000 in a savings account will put you in a stronger financial position in case of emergencies.

On the flipside, you might decide to open several savings accounts in order to fund different goals. For example, you might have a savings account specifically for vacations, another account for home repairs, and yet another for a large purchase you want to make (e.g. new appliances or upgraded furniture for your home).

Figuring out what you are saving for, and how long you plan to keep your money in an account, can help you determine the right amount of savings for your goals.

How to open a savings account

How to open a savings account depends on the type of institution you want to work with. If you plan to open an account with a brick-and-mortar bank or credit union, for example, you will head to a physical location to open your account in person. Conversely, online banks let you open a savings account (and other types of accounts) entirely online and from the comfort of your home.

Either way, you'll need to provide personal information to open a savings account, such as your legal name, your address, your phone number, and your Social Security number. You may also have to provide photo identification in some cases.

You will also need to fund your account in some way, either by bringing cash to the bank or writing a check to deposit into your new account. If you're opening an online savings account, you can make your initial deposit electronically from any other bank account you have.

Three savings account alternatives

If you want to earn the most interest you can on your savings, your best bet is a high-yield savings account. This type of account is typically offered through online financial institutions. High-yield savings accounts currently pay between 4.50% APY and 5.50% APY.

Alternatives to a savings account include:

• Cash Management Accounts (CMAs): Cash management accounts are offered by online technology companies, brokerage firms, and robo-advisors, including Betterment, Charles Schwab, Robinhood, and SoFi. These accounts pay interest and come with a plethora of features, and you can typically access your funds with a debit card.
• Certificates of Deposit (CDs): This type of savings instrument requires you to deposit a set amount of money for a set amount of time (i.e., 12 months to 60 months or longer). While CDs pay a higher rate than savings accounts on average, you may pay a penalty to access your money early.
• Money Market Accounts: Money market accounts are savings accounts that come with some of the features of checking accounts. For example, you may receive a debit card and checks you can use if you want to access your money.

How to find the best savings accounts

The best savings accounts are ones with the highest possible return and the lowest fees (or no fees), as well as FDIC insurance on your deposits. With that in mind, you'll want to compare institutions and accounts based on these factors, as well as any requirements they have in place.

For example, find out how much you need to deposit in order to open a savings account. Learn about minimum account balance requirements that help you avoid monthly fees, and skip over any accounts that charge unreasonable fees just to keep your account open.

In the meantime, decide whether you want to work with a traditional financial institution or an online bank. Where regular banks and credit unions offer a more personal experience, online bank accounts tend to offer the lowest rates and fewer fees.