It’s generally wise to have a savings account, and they’re mostly free—especially at online banks, community banks, and credit unions.
Keeping cash elsewhere that you don’t plan to spend in the immediate future is unsafe, and using a savings account has a psychological benefit: It’s tempting to spend money in hand. A savings account, however, can be a means of setting aside funds to reach longer-term goals.
Safety
A savings account holds your money in a safe place: your bank or credit union.
Cash that’s outside of the bank can get stolen or damaged in a fire. But when the federal government insures your savings, you avoid the risk of losing money if your bank or credit union fails. Banks are covered by FDIC insurance, and credit unions are covered by NCUSIF insurance.3 4 Savings accounts at credit unions often are called share accounts.
Savings accounts offer easy access to your cash. Once you’re ready to spend money, you can withdraw cash or transfer funds to your checking account to pay by check, debit card, or an electronic funds transfer. You can make cash withdrawals from your savings account at an ATM or with your bank’s tellers.
Growth
Savings accounts pay interest on money in your account.2 As a result, your bank will make small additions to your account, typically every month. The interest rate depends on economic conditions and your bank’s desire to compete with other banks.
Savings account rates are generally not very high and may not even match inflation, but your risk of loss is virtually nonexistent when your funds are federally insured. A little bit of interest is better than nothing, which typically is what you’ll get from a checking account.
To compare savings accounts, you’ll want to look at the annual percentage rate (APY) paid on the account, as well as details like minimum deposit amounts, fees, and other features.