What Is a Savings Account?

A savings account is a safe place to store cash and earn interest. Rates on some accounts are near 0.50%.

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What is a savings account?

A savings account is a bank account that lets you store your money securely while typically earning interest. This means the bank pays you to keep your funds deposited, with annual yields on some accounts reaching 0.50%. Also, unlike investments, savings accounts are federally insured up to $250,000, so you will not lose your money if the bank fails.

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Why you need a savings account

Using a savings account creates some distance between everyday spending money, kept in your checking account, and cash that's meant for a later date, like an emergency or a vacation. Unlike most checking accounts, savings accounts also typically earn interest.

Frequently asked questions

You open a savings account at a bank or credit union and deposit money into it.

  • While it’s stored in the account, your money earns interest, paid by the bank.

  • You can continue to add funds to the account to work toward a savings goal, such as paying for a vacation or building up an emergency fund.

  • You can also withdraw money from a savings account, though there may be some restrictions on how frequently.

Funds in savings accounts are federally insured up to $250,000 per depositor at insured banks and credit unions. That means that if the bank or credit union fails, you can claim your money, up to the insured amount. Inflation can chip away at the value of money you have saved over time; see how it works with our inflation calculator.

A savings account is valuable even when interest rates are trending down. It’s a safe place to keep money, thanks to federal insurance. It offers easier access to your funds than an investment account does, but less access than a checking account does, which can help you intentionally save toward your goals.

What you need to know about savings accounts

Savings accounts with strong APYs can help your money grow. Lending the bank money enables it to offer loans to other customers, so the bank is paying you a little interest as a thank-you.

"A little interest" is all too true for most accounts, which offer low rates, but you can find higher rates at online banks. These banks don't have to support expensive brick-and-mortar branches, enabling them to offer annual percentage yields, or APYs, that are significantly higher than the national average of 0.06%. The accounts also tend to have low initial deposit requirements and typically don't charge monthly maintenance fees.

Compare online savings accounts
Choose an online savings account with strong rates and low fees.

Money kept in a savings account isn't quite as accessible as cash kept in a checking account. Banks typically limit the number of certain transfers from a savings account — online, or by check or debit card, for example — to six a month. Making additional transfers typically results in a fee. Note that taking money out through a teller or ATM doesn't count toward the six-per-month figure.

The limit used to be a federal requirement, but in April 2020, the Federal Reserve announced it would remove the cap in response to widespread financial distress caused by the coronavirus situation. As a result, some banks and credit unions have relaxed this restriction.

Savings accounts help you store money you don’t need immediately. Avoiding excessive savings withdrawals can ensure it's there when you do. 

It’s worth noting, however, that withdrawal limits may be a blessing in disguise. Savings accounts help you store money you don’t need immediately. Avoiding excessive savings withdrawals can ensure it's there when you do.

If easier access to cash is what you're looking for, however, consider opening a checking account. You can read NerdWallet's list of best checking accounts to find ones that don't have many fees and might even earn interest.

How much to keep in your savings account

It's smart to keep three to six months’ worth of living expenses in your savings account in case of job loss or another emergency. You may need to put away more if you have additional savings goals, such as a new car or special vacation. But saving even $500 can get you out of many minor financial scrapes.

You can start by making automatic deposits from checking to savings on a regular basis, such as each payday. Saving as little as $25 a week can add up to more than $500 after five months.

After you build a cushion, look to the future. Consider investing for long-term goals, such as retirement. An individual retirement account, for example, is a solid next step for those with sufficient savings. An IRA may be riskier than a savings account, depending on the investments you choose within it, but it may also provide better returns over time. (Learn how to figure out how much you should save for retirement. Also, read more about individual retirement accounts.)

Alternatives to savings accounts

There are other short-term savings options that don't involve investment risk. Here are a few federally insured alternatives:

Money market accounts are savings accounts that usually have some checking features. For example, they might come with a debit card or the ability to write checks. But as with regular savings accounts, transactions are typically limited to a handful per month.

Certificates of deposit, or CDs, hold money for a fixed term, anywhere from a few months to a few years. Generally, the longer the term, the higher the interest rate. Open a CD only with money you won't need immediately, because withdrawing money before the end of the term usually carries a penalty.

» Read up on types of CDs

Cash management accounts, or CMAs, are cash accounts that are offered by nonbank financial service providers like investment firms or robo-advisors. They pay interest and can be especially convenient if you have an investment account with the same provider. (Read how CMAs compare to high-yield savings accounts.)

» Dig deeper with NerdWallet’s guide to the 5 best alternatives to traditional savings accounts

Where to find the best savings accounts

If a basic savings account serves you best, start your search by looking at online banks and credit unions. These types of financial institutions, which are heavily featured in NerdWallet's list of best savings accounts, keep fees to a minimum, offer good rates and usually have strong mobile apps to help you manage your savings. If you plan to do most of your banking at a neighborhood branch, however, compare accounts at some of the best national banks that are near you.

You can open a savings account by submitting an application, typically online or at a branch. You’ll need to provide your Social Security number and contact information, along with at least one form of identification, such as a driver’s license or a passport. When the account is open, you can make your first deposit with an online transfer from another bank account. Your bank may also accept paper checks or even cash deposits if you’re opening the account in person.

A good savings account provides a safe place to park your money while it also earns interest. By opening one with strong rates and low fees, and by making regular deposits, you can help make sure you have funds set aside for your savings goals.

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