Keeping funds in a savings account is a great way to grow wealth over time and collect money for short-term and long-term goals. While you could also store cash in a piggy bank and avoid the hassle of choosing and opening a savings account, you’d be missing out on two huge benefits—savings accounts are safer, and they pay interest.

Still, there are several more advantages and a few disadvantages you should be aware of before opening a savings account. In this guide, we’ll present you with all the savings account pros and cons, show you how to open an account, and help you pick the best one for your needs.

How Do Savings Accounts Work?

Before exploring the main pros and cons of savings accounts, it’s crucial to understand how these accounts work and what they’re used for.

Savings accounts are opened at traditional brick-and-mortar financial institutions, online banks, or credit unions. Depending on your financial institution, your savings account is typically insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA).

These accounts offer a safe and reliable way to grow your funds, so they’re a good option for:

• Creating an emergency fund
• Saving for short-term goals like a vacation
• Transferring extra cash from a checking account to earn interest

Savings accounts can also be a good choice for collecting money for specific financial goals like retirement or college. In these cases, you should opt for savings accounts designed for such goals. For example, if you want to save for retirement, you can choose a Roth IRA, and if you want to save for college expenses, you can look into 529 plans.

The Main Savings Account Advantages and Disadvantages—An Overview

Before we take a closer look at the main pros and cons of a savings account, here’s a quick overview of the benefits and drawbacks of keeping money in these accounts:

Pros of a Savings Account	Cons of a Savings Account
Includes FDIC or NCUA insurance Pays interest Allows easy money access Typically includes unlimited withdrawals Can be linked to a checking account	Low interest rates compared to investments like stocks and mutual funds Varying interest rates May require a minimum balance to avoid fees Could charge monthly maintenance fees Taxed earned interest

Pros of a Savings Account

Opening a savings account offers the following advantages:

1. Easy money access
2. Federal insurance
3. The ability to earn interest
4. The possibility of linking a checking account

Easy Money Access

Unlike certificates of deposit (CDs), which require you to leave your money in the account for a certain period, savings accounts generally have no withdrawal limits. This means you can take the money out of a savings account whenever you need it. 

Although Regulation D imposed withdrawal rules on savings accounts in the past, these were suspended by the Federal Reserve Board in 2020. However, some banks may still limit your withdrawals to six per month, so you should check if that’s the case with your bank to avoid incurring fees.

Federal Insurance

Savings accounts are considered one of the safest investments because earning interest is guaranteed, and money losses are rare. This is because most savings accounts are insured up to $250,000 per account holder, so if your financial institution fails, you’ll receive reimbursement up to the said amount. The insurance is provided either by the FDIC for bank accounts or the NCUA for credit union accounts.

Still, losing money from a savings account isn’t impossible. If the amount of money in your account is higher than the insured amount, you’ll lose the difference if your bank fails.

The Ability To Earn Interest

Keeping funds in a savings account allows you to earn and compound interest. The amount of interest you can earn this way depends on your account’s compounding frequency—whether the interest is paid back monthly, quarterly, or annually. 

Although savings accounts offer low interest rates, they’re still higher than the rates paid by checking accounts. In fact, FDIC reveals that the average interest rate for savings accounts is 0.45%, while checking accounts have a rate of 0.08%. Plus, if you want to earn more, you can also opt for a high-yield savings account, which offers an annual percentage yield (APY) sometimes even ten times higher than traditional savings accounts.

The Possibility of Linking a Checking Account

You can typically link your savings account to your primary checking account, allowing you to transfer funds from one account to the other. This way, you can: 

• Transfer extra cash to your savings account and have it earn interest instead of sitting in a checking account where it won’t earn much (or anything) 
• Transfer money from the savings to the checking account if you need to cover larger expenses

This benefit also allows easier access to your funds since checking accounts let you withdraw cash from an ATM using a debit card.

Cons of a Savings Account

The main disadvantages of putting money in a savings account include:

1. Variable interest rates
2. Taxes on interest
3. Minimum opening and balance requirements
4. Potential fees
5. Safety issues

Variable Interest Rates

One of the largest disadvantages of having a savings account is the variable interest rate. The rate at which you earn interest depends on the federal funds rate—the benchmark interest rate determined by the Federal Reserve. If this rate goes down, so does your account’s APY, directly impacting the speed at which your money grows.

While variable interest may also positively impact your earnings if the rate goes up, it’s typically considered a disadvantage because the rate at which you earn interest is unstable. This means you’re never certain how much money you’ll accrue in a few years.

Taxes on Interest

Any interest you earn on your savings is considered taxable income. However, you only have to pay taxes on the interest, not on your savings account balance. For example, if you put $5,000 in a high-yield savings account and earn 4% APY, you’ll earn an interest of $200 after one year and only pay income tax on that amount.

Minimum Opening and Balance Requirements

Some banks may impose minimum balance requirements, and if you don’t meet these, they could charge you a fee. You may also need to pay an account opening fee, which ranges in cost depending on your financial institution and account type:

• Large banks—Banks with over a thousand branches may require an opening deposit of $25 to $100, but some banks have no minimum deposit requirements
• Traditional credit unions—These usually have minimum opening requirements of around $5
• Online financial institutions—Banks and credit unions that operate online usually offer high-yield savings accounts and require a minimum deposit ranging from $0 to $100

Potential Fees

Besides minimum deposit and balance requirements, some banks/credit unions may include fees like:

• Monthly maintenance fees
• Overdraft fees
• Wire transfer fees

Luckily, these fees can be avoided by following your bank’s rules and requirements.

Safety Issues

Scammers can’t get into a savings account without the necessary information, so many people disregard the possibility of a security breach. What many business owners and individuals don’t realize is that fraudsters have developed seamless, sophisticated strategies that are hard to detect.

A single click on a malicious link that appears to be from your bank can allow bad actors to install malware on your device and gather the data. Once they’re in, they could quickly drain your account and disappear without a trace.

Which Savings Account Should You Choose?

While savings accounts may have variable rates and sometimes incur fees, they’re still a great place to keep extra funds since they can help you grow wealth, provide insurance, and allow easy money access. These benefits make them a better money-saving option than collecting funds in cash and a safer option than investing in stocks.

Still, choosing the best savings account depends entirely on your needs. Here are four types of savings accounts that offer diverse features, perks, and interest rates:

1. Traditional savings account—A basic savings account that provides a safe place to grow your funds but offers relatively low interest rates
2. Credit building savings account—A savings account that lets you build credit and save money at the same time
3. Money market account—This account combines the features of checking and savings accounts, allowing you to keep your money safe but also gain access to a debit card and checks
4. High-yield savings account—An account that typically offers an APY of 4–5%, meaning you can grow your funds significantly faster than with a regular savings account

A high-yield savings account is a safe place to keep your money, earn interest, and grow your savings. It’s a great alternative to other types of savings accounts because it:

• Gives you higher returns on your deposits, and you don’t have to start with much to build substantial funds
• Circumvents the market-related risks of options, such as bonds, stocks, cryptocurrency, and ETFs

In addition to growing your funds in a savings account, you also want to protect them from fraud attempts. The only high-yield savings account that lets you save and grow funds while providing maximum fraud protection is FortKnox. This platform allows you to save money, earn interest, and never worry about fraudsters draining your account.