Types of savings accounts and how to choose one

What is a savings account?

A savings account is a secure place to keep money you aren’t spending right now. Traditional savings accounts are liquid, meaning the funds are available when you need them. They are useful for a range of financial goals, including:

• Building an emergency fund
• Saving for a vacation or major purchase
• Setting aside money for irregular expenses like taxes or home repairs

How does a savings account work?

You open a savings account at a bank or credit union and deposit money into it. Over time, your account earns interest on your balance, meaning the bank pays you a small amount for keeping your money there. Keep in mind that while savings accounts do earn interest, the rate is generally lower than what you might earn through other investment options.

You can access your money in several ways:

• Through an ATM
• At a physical bank branch
• By transferring funds to a checking account

Most savings accounts don’t include a debit card or checkbook, though some account types do. Your bank or credit union can confirm any restrictions on withdrawals, minimum balances and the interest rate offered.

Are savings accounts insured?

If a bank or credit union were to fail, insured accounts are protected up to certain limits. Most savings accounts are insured up to $250,000 per depositor, per ownership category, per institution. That coverage is based on ownership categories, not the number of accounts you have. Depending on how your accounts are structured, you may be eligible for coverage beyond the standard $250,000 limit.

• Banks are insured by the Federal Deposit Insurance Corporation (FDIC).
• Credit unions are regulated and supervised by the National Credit Union Administration (NCUA).

Types of savings accounts

There are several types of savings accounts, and each one tends to work better for a specific goal. Here’s a quick look at how common savings goals map to account types:

Emergency savings: keeping your funds set aside

An emergency fund is money set aside to cover unexpected costs. Common examples include:

• Job loss
• Medical bills
• Urgent home or car repairs

Without one, you may end up relying on credit cards or loans when an unplanned expense comes up. Most financial professionals recommend keeping three to six months of living expenses in an emergency fund. Use our emergency fund calculator to help estimate how much you may need.

Because emergency funds aren’t touched often, you may want to keep them in an account that earns a competitive interest rate while still allowing access when you need it. Two options that may be a good fit:

• High-yield savings account: A HYSA offers a higher interest rate than a traditional savings account, though it may come with higher minimum balance requirements or fees.
• Money market account: These may offer competitive interest rates and can give you more flexibility than a traditional savings account, including some check-writing and debit card access.

Short-term savings: the account for flexible goals

Some expenses are predictable but don’t come up every month. Examples include:

• Gifts
• Travel
• Real estate taxes
• Insurance premiums
• Other irregular household costs

Setting money aside for these in advance helps reduce the stress to cover them when they arrive. A traditional savings account can work well for this type of saving. Most offer online access and easy transfers, and some allow direct deposits, which can make it easier to automate your savings routine. While the interest rate may be lower than other account types, the simplicity and flexibility can be worth it for money you may need on relatively short notice.

Goal-based savings: planning for a specific purchase

If you’re saving for something specific in the future, like a new car, a wedding or a dream vacation, a certificate of deposit (CD) may be worth considering. With a CD, you deposit a set amount for a fixed period, typically ranging from a few months to several years, and earn a fixed interest rate. In general, the longer the term, the higher the rate. Because you agree to leave the money in the account until the term ends, CDs work best for funds you know you won’t need in the near term. A few things to keep in mind:

• CDs often require a minimum deposit
• They typically renew automatically at maturity (when the term ends) unless you direct the bank otherwise
• Withdrawing funds early may result in a penalty

Long-term savings

When you’re saving for something further out, like a down payment on a home or retirement, you may want to think beyond a traditional savings account. For longer time horizons, investing your money can offer greater potential for growth, though it also comes with more risk. Some options to explore include:

• Retirement accounts like a 401(k) or IRA
• Mutual funds and other investment vehicles

Savings accounts are one piece of a broader financial picture. To keep learning, you may also find it helpful to explore the basics of investing or tips for achieving financial wellness.