Pros and Cons of Savings Accounts

Pros of Savings Accounts

Opening a savings account offers several benefits, including:

Easy Access to Funds

You can typically withdraw money from a savings account at any time. Although some banks may set monthly withdrawal or transfer limits and charge fees for exceeding them, accessing funds is still easier than with certificates of deposit (CDs), which charge a penalty if you take money out before the account matures.

Most banks also let you link your savings account to a checking account at the same bank or at a different financial institution. This makes it easy to automate savings deposits and move money into your checking account when you need it.

Ability to Earn Interest

Money in a savings account earns interest, helping your savings grow faster than if it were in your checking account. The annual percentage yield (APY) on a savings account measures how much interest your money could earn in a year. While rates can vary depending on the financial institution and market conditions, high-yield savings accounts (HYSAs) typically offer significantly higher APYs than traditional savings accounts.

Learn more: Current Average Savings Account Interest Rates

Federally Insured

Your money is insured up to $250,000 per depositor, per financial institution and per account ownership category if your savings account is held at a bank insured by the Federal Deposit Insurance Corp. (FDIC) or a credit union insured by the National Credit Union Administration (NCUA). (Account ownership categories include single accounts, joint accounts and trust accounts.) Even if the bank fails, your savings are protected up to FDIC or NCUA limits.

Require Little or No Money to Open

Unlike some savings and investment vehicles, many savings accounts can be opened with no initial deposit. Many online-only banks have no minimum deposit requirements. Brick-and-mortar banks are more likely to request a deposit, but it's often as low as $25. (Keep in mind that banks with no minimum opening deposit requirements may have ongoing minimum balance requirements.)

Cons of Savings Accounts

Savings accounts also have a few potential downsides to be aware of.

Interest Rates Can Vary

Savings account interest rates can vary along with the federal funds rate, which is a benchmark interest rate set by the Federal Reserve. If the federal funds rate drops, your APY may drop, too, which can affect how fast your savings grow.

May Have Minimum Balance Requirements

Many banks require you to keep a certain minimum balance in your savings account to avoid paying account maintenance fees. There are also tiered savings accounts that offer different APYs depending on your account balance. If maintaining the required minimum balance isn't realistic for your budget, you could face fees that may outweigh your earnings.

May Charge Fees

Some savings accounts charge fees for wire transfers, using out-of-network ATMs, account balances dropping below the minimum or exceeding monthly withdrawal limits. There may also be inactivity fees if you go a certain number of months without making any deposits or withdrawals. Bank fees can eat into your savings, potentially canceling out any interest you earn.

Learn more: Common Savings Account Fees

Inflation Risk

If the interest earned on your savings account doesn't keep pace with inflation, the value of your money will shrink over time. The risk of inflation is one reason savings accounts are best used for emergency funds and short-term financial goals, rather than long-term goals such as saving for college or retirement.

Interest Is Taxable

You'll have to pay income tax on the interest your savings earn. The good news: There's no tax on your savings account balance—just on the interest.

How to Choose a Savings Account

To choose the best type of savings account, follow these steps.

1. Compare APYs. You can use Experian's free savings calculator to estimate how much interest your savings could earn based on account APYs.
2. Review fees. If there are requirements for waiving fees, can you meet them?
3. Check minimum opening deposit and minimum balance requirements. Are they realistic for your budget?
4. Confirm insurance. Look for a financial institution that is FDIC- or NCUA-insured to safeguard your money.
5. Consider ease of access. Evaluate the convenience of the bank's ATM and branch options, as well as the mobile app. How easily can you withdraw or transfer money when you need it?
6. Complete an application. You can usually apply for a savings account online or in person; check the bank's website for details and to see what documentation you'll need. Be prepared to make any minimum deposit required to open the account.

Learn more: Best High-Yield Savings Accounts

Alternatives to Savings Accounts

Traditional or high-yield savings accounts aren't the only option for your savings. Depending on your goals, you may want to consider the following alternatives to savings accounts.

• Certificates of deposit (CDs) work best for medium-term savings goals, such as home down payments. CDs are deposit accounts at banks and credit unions that usually offer fixed APYs higher than rates for traditional savings accounts. However, you typically face penalties if you withdraw funds before the CD's term ends, usually in three months to five years.
• Money market accounts combine features of checking and savings accounts. They typically earn higher APYs than traditional savings accounts and allow you to write checks or sometimes use debit cards, which is convenient if you need money fast in an emergency.
• Cash management accounts, available from nonbank financial institutions such as brokerage firms, mingle features of checking accounts, savings accounts and brokerage accounts. They usually earn higher interest rates than traditional savings accounts, allow you to write checks and pay bills online, and are typically eligible for FDIC insurance through partner banks.

Frequently Asked Questions

The Bottom Line

Regularly depositing money into a savings account can help you build an emergency fund and save for short-term goals while keeping funds easily accessible. You can put your savings on the fast track by automating transfers to your savings account or setting up direct deposit.

Opening a high-yield savings account could also help your savings grow faster. For example, the Experian Smart Money^™ Digital Savings Account, available with your free or paid Experian membership, offers a competitive APY with no monthly fees^¶, minimum balance or direct deposit requirements. See terms at experian.com/legal.