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Guide to Savings Accounts

Guide to Savings Accounts
Jacqueline DeMarco
Jacqueline DeMarcoUpdated January 4, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
A savings account can be a great place to set money aside for short-term goals like building an emergency fund or saving up for a vacation. These accounts pay interest on your deposits, keep your money safe, and are easy to access.Here’s what you need to know about savings accounts, including how they work, their pros and cons, plus how they compare to other types of bank accounts.

What Is a Savings Account?

A savings account is an interest-bearing account designed to hold money you don’t plan to spend immediately. They’re offered by traditional banks, online banks, and credit unions. While the interest rate you can earn on a savings account is generally low, there’s little risk involved. Unlike investments, savings accounts are federally insured up to $250,000 per account by ownership category. Savings accounts are also liquid, which means you can easily access your money when you need it. As a result, they can be good for building an emergency fund, saving for a short-term goal (like buying a car or going on vacation), or simply transferring surplus cash you don’t need in your checking account so it can earn more interest.

How Do Savings Accounts Work?

You can often open a savings account with as little as $1 — though some high-yield accounts may require higher minimum deposits. Some savings accounts also require you to keep a minimum balance in order to avoid monthly fees or earn the highest published rate, while others have no balance requirement. You can transfer money in or out of your savings account online, at a branch or ATM, using mobile check deposit, or via direct deposit. The amount you can withdraw from your account is limited only to how much is in your account.Savings accounts do have some restrictions, though. Since these accounts are designed for saving rather than spending, you’re typically limited to a certain number of withdrawals per month. While the federal rule that restricted savings account holders to six withdrawals per month has been lifted, many banks still impose fees if you exceed six (or, in some cases, nine) withdrawals per month.The interest rate you earn on a savings account is usually expressed as an annual percentage yield (APY). An account’s APY tells you the amount of money you’ll earn on the account over one year. It includes compound interest, which is the interest earned on the money you put into the account along with the interest that money receives over time. Depending on the savings account, the interest can be compounded daily, monthly, or quarterly.Your savings account APY is variable, however, and can change at any time. 

Pros and Cons of Savings Accounts

Allows you to earn interest on your moneyMonthly withdrawal limits
You can’t lose your money Interest rates are generally  low
Funds are easily accessibleNot ideal for long-term savings goals
Can be conveniently linked to your primary checking account.Interest is usually taxable
There are both advantages and disadvantages associated with savings accounts. Here are some you may want to keep in mind.


Savings accounts allow you to earn interest on your money just by leaving it in the bank. While the interest may not be high, savings accounts are insured and offer a fairly consistent rate of return. While stocks or mutual funds can offer the potential for much higher returns, there is also a chance you could lose money.Savings accounts also offer convenience. Unlike some other savings vehicles, you don’t have to leave your money untouched for a certain period of time. When you’re ready to spend your savings, you can easily access your funds. It’s also easy to transfer money between your checking and savings account, especially if they are at the same bank.


The trade off for the safety and liquidity you get with a savings account is that it generally won’t offer as much interest as you might get with a savings vehicle that involves more restrictions or risk. If your interest rate is lower than the inflation rate, any money you store in a savings account can lose purchasing power over time. For this reason, savings accounts aren’t considered ideal for long-term savings goals like retirement or a child’s college education. Also, unlike some tax-advantaged savings vehicles, the interest you earn on a savings account is generally taxable.Also keep in mind that while savings accounts are liquid, they typically come with some restrictions. Many banks will impose a fee if you exceed six withdrawals per month.

Savings vs Checking Accounts

When comparing savings vs. checking accounts, you’ll want to keep in mind that checking accounts are designed for daily money management, while savings accounts are meant for parking money you don’t need right away.With checking accounts, there are no limitations on how often you can withdraw money. You can use your checking account as often as you like to get cash, write checks, make purchases online, and make debit card purchases in person.Unlike savings accounts, however, checking accounts typically do not earn interest, making them a poor choice for storing, and growing, your savings.Recommended: What Are Premium Bank Accounts?

Typical Savings Account Interest Rates

There is no typical savings account interest rate, as interest rates fluctuate with benchmark rates. As of October 17, 2022, the average savings account rate was 0.21. However, you can often earn many times the national average by choosing a high-yield savings account (more on that below).

Bank Accounts With Higher Interest

While a savings account can be a great place to start building up a cash reserve, it’s also understandable if you’re eager to make your money grow even faster. Here are two other options that offer safety and liquidity but may pay a higher APY than a traditional savings account.

High-Yield Savings Accounts

A high-yield savings account works like a normal savings account, but can pay as much as 20 times the average savings account. You can find high-yield savings accounts at national brick-and-mortar banks, as well as online banks. Because online banks don’t have physical branch locations (and high overhead), they typically offer high-yield savings accounts with higher APYs and lower fees than traditional banks.

Money Market Accounts

A money market account acts like a hybrid between a checking and savings account. These accounts typically offer interest (and APYs may be higher than what you can get with a conventional savings account), along with some of the benefits that normally only come with having a checking account, such as the ability to write checks and use of a debit card for withdrawals and purchases. Recommended: What Is a CD Ladder and How Do They Work?

The Takeaway 

A savings account can help you save up for your near-term financial goals, such as buying a car or paying for a wedding or vacation. These accounts keep your money separate from your everyday spending and earn interest without putting your funds at risk. Once you reach your savings goal, you can easily access the funds. Because savings accounts typically pay low interest rates, however, they are not ideal for mid- to long-term savings goals.If you’re interested in finding the best rate for your savings, Lantern by SoF can help. With our online banking marketplace, it’s easy to compare high-yield savings accounts based on interest rate, fees, and balance minimums. Shop online savings accounts and find the best rate with Lantern today.

Frequently Asked Questions

What is the point of a savings account vs a checking account?
Are there different kinds of savings accounts?
Does money really grow in a savings account?
Photo credit: iStock/ferrantraite

About the Author

Jacqueline DeMarco

Jacqueline DeMarco

Jacqueline DeMarco is a personal finance writer and editor based in Southern California. While she spends the bulk of her time writing about complex financial issues, she also tackles a variety of subjects ranging from food to fashion to travel. Her work can be found across dozens of publications such as Credit Karma, LendingTree, Northwestern Mutual, The Everygirl, and Apartment Therapy.
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