A savings account is one of the simplest financial tools most people use, but it’s also one of the most important. It gives you a safe place to store money you don’t need today, earns interest on your balance, and keeps your cash easy to access when life throws you a curveball.
Whether you’re building an emergency fund or saving toward a short-term goal, a savings account can help you stay organized and prepared.
What is a savings account?
A savings account is a place to store money you don’t need right away while earning a modest return on it. Unlike cash sitting in a checking account, savings balances earn interest. Unlike investments, savings accounts don’t fluctuate in value.
When held at an FDIC-insured bank and kept within insurance limits, savings accounts carry virtually no risk. That makes them a popular home for emergency funds, short-term goals, and money you want to keep safe and accessible.
Keeping savings separate from your checking account can also make it easier to track progress toward a goal and reduce the temptation to spend money meant for later.
FDIC
How savings accounts work
When you deposit money into a savings account, the bank uses some of those funds to make loans to other customers. In return, the bank pays you interest for letting it use your money.
Savings account interest rates typically move with the federal funds rate and can change at any time. Some banks, especially online banks, offer higher rates to attract new deposits.
Any interest you earn in a savings account counts as taxable income, even if you leave it in the account.
Savings deposits provide banks and other financial institutions with capital they can use to make loans.
FDIC insurance explained
Savings accounts at FDIC-insured banks are protected up to $250,000 per depositor, per institution, per ownership category. If a bank fails, the FDIC steps in to ensure insured depositors don’t lose their money.
This protection is a key reason savings accounts are considered one of the safest places to hold cash.
What are the pros and cons of a savings account?
Savings accounts have many advantages. The pros of savings accounts include:
- A separate account to save money for a future need.
- They make it easier to set and monitor savings goals.
- You can open multiple savings accounts to save money for several specific purposes (e.g., emergency, wedding, vacation, boat).
- They're easy to set up.
- You can link them to other accounts for transfers.
- You'll earn interest income to increase savings.
- They're accessible and liquid. You can withdraw all your savings without penalty at any time.
- They're completely risk-free if held at an FDIC-insured financial institution and under the insurance limit.
There are some drawbacks to savings accounts. These cons include:
- They typically pay much lower interest rates than other account types, like certificates of deposit (CDs), Treasury bills, and money market accounts.
- Some savings accounts require you to maintain a minimum account balance to avoid fees or earn a higher interest rate.
- Easy access can make it tempting to spend the money sitting in a savings account for something other than its designated purpose.
Not all savings accounts look the same, and trade-offs can vary by bank. If you’re comparing options, our guide on how to choose a savings account breaks down what to look for, from interest rates to fees and access.
When a savings account makes sense
Savings accounts work well for money you may need on short notice. That includes emergency funds, near-term purchases, and cash you’re setting aside for a specific goal.
They’re generally not designed for long-term growth. For money you won’t need for many years, investments like stocks or bonds may offer higher potential returns, but with more risk.
Common ways people use savings accounts
Savings accounts can be undesignated accounts used to earn interest on money that isn’t needed right away. However, many savers open savings accounts for specific purposes.
Saving for emergencies
One of the most common uses for a savings account is an emergency fund. Because the money is safe and accessible, savings accounts are well-suited for unexpected expenses like medical bills, car repairs, or temporary income loss.
Many financial professionals recommend starting with a small cushion, such as $500, and gradually building toward three to six months’ worth of living expenses.
Saving for a specific goal
Savings accounts also work well for short-term goals like a vacation, wedding, or home down payment. Using a dedicated account makes it easier to track progress and stay motivated.
For example, if you’re aiming to save $25,000 for a home purchase, keeping that money in a separate savings account lets you see your progress clearly while earning some interest along the way.
The bottom line
A savings account offers a safe, flexible place to store money you don’t need immediately. While the returns are modest, the combination of security, liquidity, and simplicity makes savings accounts a core tool for managing short-term cash and building financial stability.
Want a higher rate on your savings? We regularly review and compare the best high-yield savings accounts to help you find options with competitive rates, low fees, and easy access to your money. If you want your cash to work a little harder while staying safe, it’s worth taking a look.
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