Who Should Open a Savings Account?

A savings account is the most basic type of bank account and is appropriate for almost anyone interested in smart money management. If you are trying to accumulate funds to reach a short- or long-term goal and want to keep your money safe in the meantime, a savings account can help you earn interest while keeping your funds readily available. They do have limitations, however. If you’re considering a new account, this is what you need to know about who should open a savings account and why.

If you’re looking for help expanding your savings, you could consider talking to a financial advisor.

Savings Account Basics

A savings account is often the first financial account someone opens. It’s available from many financial institutions of different varieties, such as banks and credit unions, and is relatively easy to open, with little paperwork and hassle required. Savings accounts also have deposit insurance through the Federal Deposit Insurance Corporation (FDIC), so you can rest assured that there is no chance of losing your money.

Most accounts have low or no minimums, and they pay varying interest rates that will change with the prevailing interest rate trends. The interest rates paid by savings accounts are generally less than the rate of inflation, however. This means your money will, over time, lose purchasing power as prices for goods and services rise faster than the interest it accumulates. In order to combat inflation, you will need to put money into certain investment types, such as stocks.

A savings account is a place for money that you don’t plan to spend soon. While you are able to access your funds at any time, keep in mind that some savings accounts may have limits on the number of monthly withdrawals. Therefore, they aren’t good replacements for checking accounts or money market accounts.

Access to Your Savings Account

You can get access to your money at any time through a transfer or withdrawal, and, unlike certificates of deposit (CD), there is no penalty for withdrawing early. By putting money in a savings account, you separate it from the funds in your checking account. That creates a psychological barrier that can help prevent you from spending it.

Many financial institutions allow you to set up automatic transfers into your savings account on a regular basis. This can help you build up your account without having to initiate each individual transfer. You could also link your savings account to your checking account as a way to provide overdraft protection.

Best Uses for Savings Accounts

You can benefit from having a savings account if you have almost any type of short- or medium-term financial goal. For instance, nearly everyone is advised to build an emergency fund amounting to at least three months of living expenses. An emergency fund gives you a backstop in case you lose your job, become ill, are unable to work for a time or experience an unexpected expense, like a major car repair.

A savings account provides just the sort of safety, liquidity and convenience a rainy-day fund calls for, with the added benefit of earning interest. Other short-term savings goals that a savings account can help with include saving for a vacation, making a down payment on a new house or paying for a significant consumer goods purchase, such as a new refrigerator or television.

Long-Term Goals With Your Savings Account

Savings accounts can also help with long-term goals. For instance, it may take several years to save up enough for the down payment on a home purchase. Putting money into a savings account lets it build up safely while earning interest.

Once you have enough for the down payment, you can access the money easily just as soon as you find the perfect house and are ready to apply for a loan. Other long-term goals for a savings account includes saving for college or funding a home improvement.

While savings accounts are very useful, they aren’t the best choice for every savings goal. Financial objectives more than 10 years away are generally better addressed with long-term investments that offer the opportunity for more return than a savings account.

Saving for retirement, for example, is usually a job for a diversified portfolio of investments, such as mutual funds, exchange-traded funds, stocks and bonds.

When to Move Beyond a Savings Account

A savings account is useful for building an emergency fund, covering near-term expenses and separating spending money from reserves. However, once you have achieved these savings goals, your money may not be working as efficiently as it could. Savings accounts usually offer low interest rates that do not keep up with inflation, meaning your purchasing power declines over time.

If your savings are growing beyond what you need for short-term use, consider alternatives that offer higher returns. Certificates of deposit (CDs) and money market accounts provide modest interest with limited access.

For longer-term goals, such as saving for college or a down payment years away, investing in low-cost index funds or bonds could offer more growth potential, despite some risk.

It’s also important to match your strategy to your timeline. Money needed in the next year or two may still belong in a savings account. But money not needed for five or more years may benefit from compounding returns in an investment account. A financial advisor can help decide when to shift funds and which tools match your risk tolerance and goals.

Bottom Line

Increasingly larger stacks of coins with increasingly taller seedlings growing out of them.

A savings account is a financial tool that helps you manage your money. The combination of insurance, liquidity and interest makes a savings account appropriate for both short- and long-term goals. That includes emergency funds and major purchases. However, the interest a savings account earns will not keep up with inflation, so they aren’t ideal for certain savings goals, such as saving for retirement. Furthermore, banks may limit transactions on savings accounts, so most people will also want a checking account to pay the bills. Work with a financial advisor to create a long-term financial strategy that includes a diversified portfolio of accounts to grow your wealth over time.

Savings Account Tips

A financial advisor can help you come up with a plan to use savings accounts and other financial tools wisely. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
The money you deposit in a savings account will grow over time, but how much? SmartAsset’s Savings Calculator has the answer. Just put in the amount of money you have now, the interest rate stated as annual percentage yield, how much and how often you’ll add to it, and how many years it will be until you expect to need the money.