Savings Accounts

Savings accounts are interest-paying investments made in banks, credit unions, and other depositories. (Credit unions, however, pay dividends, not interest, on savings accounts.)

For many people, they are a convenient way to store cash, because these investments are liquid—they can be taken out and spent immediately if necessary. As a result, savings accounts are best for sums one is likely to need within a short period of one to twelve months. Because they tend to pay low earnings rates, they are not recommended for long-term investing.

Most deposits are insured by the Federal Deposit Insurance Corporation or other insurers.

Interest is credited periodically and compounded, which means the account pays interest on any interest already earned. How often it compounds varies according to the institution. The interest is taxed as ordinary income at your regular tax rate. Most deposits are insured by the Federal Deposit Insurance Corporation or other insurers for up to $100,000 ($250,000 for retirement plans) per depositor.

Because of the high cost of running financial institutions, many of them will charge penalties on some kinds of savings accounts if you do not maintain a required minimum balance.

Savings accounts are a good place to keep cash that you need liquid for day-to-day needs, short-term goals, and an emergency fund.

Informed Investor ©2007

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