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There’s not necessarily one right answer to this question.
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Savings accounts are offered by credit unions, online banks, and local and national banks. They are typically FDIC insured so there’s essentially no risk of losing money that you put into them. And they typically pay at least a small amount of interest on the deposited funds, so you can earn a small return on your money.
But, should you make use of this type of account? Is it really a good place for your hard-earned funds, or are you better off exploring other options?
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Savings accounts are the best place for some of your money
Savings accounts are the perfect place to keep money you can’t afford to lose, you may need soon, and you don’t want to spend.
If you are saving up cash for a purchase you will need to make soon, such as saving for a down payment to purchase a home in a year or two, that money belongs in your savings account. You don’t want to make a risky investment with the funds and jeopardize your homeownership dreams. You also don’t want to put money into an illiquid investment because you might not be able to sell and get the funds back in time to follow through with your goals.
You should also keep money saved for emergencies in a savings account. That way, you can access it if you need it but it won’t be mixed in with other checking account funds so you’re less likely to spend it. Since your emergency fund will hopefully sit for months or years waiting for a potential emergency to strike, it can also be helpful to earn at least some interest on the cash.
Savings accounts are the worst places for other funds
Although savings accounts are the best place for your money in the situations described above, they are not a good place for other funds.
You likely don’t want to keep your routine spending money in a savings account because the cash can be harder to access. Until recently, a federal law called Regulation D limited you to six withdrawals from savings accounts per month. While this is no longer the case, many savings accounts don’t offer debit cards or other easy ways to get ahold of your money because, after all, the purpose is to save it not spend it.
You also don’t want to put money you are going to need for retirement, college costs, or other long-term goals in a savings account. Even the best savings accounts usually provide a pretty low return on investment. This ROI may not keep pace with inflation, and it definitely won’t help you harness the power of compound growth to build wealth. It won’t enable you to take advantage of tax breaks either, which might be available with other accounts like 401(k)s, IRAs, and 529 plans.
Ultimately, whether you should put your money in savings or not depends on what you plan to do with it. You should consider whether you’re trying to invest or save, and look into whether other accounts could provide tax benefits before you decide if a savings account is right for you.
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