If you’re looking for a place to safely store (and grow) money you don’t need right away, a savings account could be a great choice. These accounts are typically federally insured, pay interest on your deposits, and allow easy access to your funds when you need them.
That said, savings accounts also have some downsides. The interest rates can be low and may not keep up with inflation, which means your money could lose spending power over time. Many savings accounts also put limits on how often you can access your refunds, such as six withdrawals or transfers per month.
Depending on your needs and savings goals, a savings account may or may not be your best option. Here’s a look at the pros and cons of a savings account, plus alternatives that could be a better choice for growing your nest egg.
What Is a Savings Account?
A savings account is a deposit account held at a bank or other financial institution that earns interest over time. These accounts are designed to help people save money while providing easy access to funds when needed. This makes them well-suited for emergency savings and money you’re setting aside for an upcoming goal like a large purchase or vacation.
Unlike checking accounts, which are primarily used for daily transactions, savings accounts are intended for longer-term deposits, and you may be limited to a certain number of transactions you can make each month, such as six or nine.
Savings accounts at banks in the U.S are typically insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per depositor per institution. In the case of joint accounts, each co-owner can get up to $250,000 in FDIC coverage across their joint accounts at the same bank. Savings accounts at credit unions have similar protections through the National Credit Union Administration (NCUA).
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Savings Account Pros and Cons
Savings accounts offer a range of benefits, as well as some drawbacks. Understanding these can help you make an informed decision about whether a savings account is the right choice for your needs and goals.
Pros
• Earns interest: Savings accounts earn interest, which means your money can grow over time. The interest rate is expressed as an annual percentage yield (APY), which tells you how much you’ll earn on your deposits over one year, including compound interest. APYs vary depending on the bank and the type of savings account. Online savings accounts generally offer higher APYs than traditional savings accounts.
• Safety and security: Funds in savings accounts are usually federally insured. This means you’re protected (up to at least $250,000) if the bank were to run into financial trouble or shut its doors.
• Liquidity: While not as liquid as checking accounts, savings accounts still allow easy access to your money. You can withdraw money or transfer it to other accounts relatively easily and quickly.
• Low or no opening deposit required: Unlike some savings and investment vehicles, you can often open a savings account with little or no money. Many online banks have no minimum deposit requirements; traditional banks may require a deposit, but it’s often as low as $25.
• Encourages saving: By keeping money in a savings account separate from your daily spending funds, you may be less tempted to spend it. Some institutions allow you to set up an automatic transfer from your checking account to your savings for a set amount on a set day (such as right after you get paid). This allows you to save without thinking about it.
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Cons
• Variable interest rates: The interest rates for savings accounts aren’t fixed, which means they can vary with the federal funds rate, the benchmark rate set by the Federal Reserve. If the Fed raises the federal funds rate, APYs on savings accounts tend to increase. However, if the Fed lowers rates, your savings account APY may go down.
• Relatively low returns: Compared to other investment options, savings accounts generally offer lower interest rates. This means your money grows more slowly than it might in higher-risk investments. As of May 20, 2024, the national average yield for savings accounts is 0.45%. However, many online banks have savings interest rates higher than the national average for savings accounts.
• Limited transactions: A federal rule called Regulation D used to limit withdrawals from savings accounts to no more than six a month. That changed in April 2020 when the Federal Reserve announced that it was removing the requirement that banks enforce the limit. Even so, banks and credit unions have largely kept restrictions in place.
• Inflation risk: The interest earned on savings accounts may not always keep pace with inflation. Any time your savings isn’t growing at the same rate as inflation, you are effectively losing money because the real value of your money is diminishing.
• May have minimum balance requirements: You might need to keep a certain amount of money in your savings account in order to avoid monthly maintenance fees and/or earn the top interest rate.
| Pros of Savings Accounts | Cons of Savings Accounts |
|---|---|
| Earns interest | Interest rate can change |
| Money is safe | Low return |
| Easy access to funds | Rates may not beat inflation |
| Automatic savings | Transaction limits |
| Takes no or little money to start | Might have fees and account balance minimums |
Savings Accounts vs Checking Accounts
While both savings and checking accounts serve essential roles in personal finance, they have different purposes and distinct features.
Checking accounts are designed for spending money. Therefore they generally offer little to no interest, come with debit cards, and allow unlimited transactions. Savings accounts, on the other hand, are set up to encourage saving. They pay interest on your deposits, don’t come with debit cards, and may place some limitations in how, and how often, you can access your cash.
Here’s a look at how these two accounts types compare side-by-side.
| Savings Account | Checking Account | |
|---|---|---|
| Main purpose | Save money and earn interest | Manage daily transactions and spending |
| Interest earned | Earns interest | Low or no interest |
| Transaction limits | Yes (typically six withdrawals/transfers per month) | No |
| Fees | Low or no fees with minimum balance | May have monthly and other fees |
| Accessibility | Moderate (designed for less frequent use) | High (designed for frequent access and use) |
| Check-writing | No | Yes |
| Debit Card | No (just ATM card) | Yes |
Is a Savings Account Right for You?
Whether a savings account is right for you depends on your financial needs and savings goals. A savings account could be the right place to stash your cash if you are:
Building an emergency fund: Due to its liquidity and security, a savings account can be a good place to keep your emergency savings.
Saving for a short-term goal: If you are saving up for a goal that is a few months to a few years in the future — such as a vacation, home improvement project, or a down payment on a car —- a savings account can be a great option.
Looking for low-risk savings: If you prefer a low-risk place to store your money while still earning some interest, a savings account can make sense. Just keep in mind that for mid- to long-term savings goals (defined as roughly five years or more), investing in the market may be more appropriate, though there is risk involved.
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Choosing a Savings Account
Savings accounts are offered by different types of financial institutions, including traditional banks, online banks, and credit unions. There are also many different types of savings accounts, including traditional savings accounts and high-yield savings accounts. Which to pick?
When choosing the right savings account for your needs, it helps to consider the following factors:
• Interest rate: APYs offered by savings accounts can vary widely, so it pays to shop around. While rates are generally low, some institutions offer higher rates, particularly online banks.
• Fees: Ideally, you want to open a savings account with no (or very low) fees. Be sure to check if there are any requirements to avoid fees, such as maintaining a minimum balance.
• Accessibility: Consider how easy it will be to access your funds and if the account comes with any limitations on how many withdrawals or transfers you can make per month. You may also want to look for accounts with user-friendly online and mobile banking options.
• Insurance: You’ll want to make sure that the institution offering the savings account is insured by the FDIC or NCUA.
Alternatives to Savings Accounts
A traditional or high-yield savings account isn’t the only place to put your savings. Depending on your goals, you may want to consider other options. Here are some alternatives.
• Money market accounts (MMAs): MMAs often offer higher interest rates than traditional savings accounts, plus a debit card and/or check-writing privileges. However, they might require a higher opening and ongoing minimum balance.
• Certificates of deposit (CDs): CDs typically offer higher interest rates than traditional savings accounts in exchange for locking your money in for a set period of time (anywhere from a few months to a few years). They can be a good option if you don’t need immediate access to your funds. However, you may be able to find a high-yield savings account that offers the same or better APY with fewer restrictions.
• Investment accounts: For longer-term goals, you may want to consider investment accounts like individual retirement accounts (IRAs), mutual funds, or stock portfolios, which can offer higher returns but come with greater risk.
• Treasury securities: U.S. Treasury securities, such as bonds and bills, are low-risk investments backed by the federal government. They offer different maturity terms and interest rates.
SoFi Savings Accounts
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
What are the cons of a savings account?
Savings accounts, while beneficial for many reasons, do have some drawbacks:
• Relatively low interest rates: Savings accounts generally offer lower interest rates compared to other investment options.
• Limited transactions: You may be limited to six withdrawals and transfers per month. Exceeding this limit can result in fees.
• Inflation risk: The interest earned may not always keep pace with inflation, potentially reducing the purchasing power of your savings over time.
• Opportunity cost: Funds in a savings account might earn less compared to higher-yield investments, representing a missed opportunity for greater returns.
What is the benefit of a savings account?
Savings accounts offer significant benefits. They provide a safe and secure place for your money (since your deposits are typically insured up to $250,000). These accounts also earn interest, allowing your money to grow over time, albeit often at a modest rate. In addition, savings accounts offer easy access to your funds when needed. And many come with minimal or no fees, though a minimum balance may be required.
Is it worth putting money in a savings account?
Yes, putting money in a savings account can be worth it, especially for specific financial needs. For example, savings accounts can be the ideal spot for building an emergency fund due to their safety, liquidity, and ease of access. They can also be a good choice for short-term savings goals, such as vacations or major purchases. Since interest rates are relatively low, however, they are generally not ideal for long-term savings goals like retirement or a child’s college fund.
Photo credit: iStock/Ridofranz
SoFi members with direct deposit activity can earn 4.50% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.50% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.50% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 8/27/2024. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
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