Savings Accounts

Account Management

Savings Accounts

A savings account is simply an account for you to put money in and earn interest. Though these accounts typically pay a modest interest rate, their safety and reliability make them a great option for parking cash you want available for short-term needs. Savings interest is paid tax-free and most won't pay any tax on it at all. Basic-rate taxpayers can earn £1,000/year tax-free and higher-rate taxpayers £500, so it's only those with very large amounts of savings who would need to worry about this – and that's less than 5% of us.

It’s generally wise to have a savings account, and they're mostly free—especially at online banks, community banks, and credit unions.

Savings accounts have some limitations on how often you can withdraw funds, but generally offer exceptional flexibility that’s ideal for building an emergency fund, saving for a short-term goal like buying a car or going on vacation, or simply sweeping surplus cash you don’t need in your checking account so it can earn more interest.

Keeping funds elsewhere that you don't plan to spend in the immediate future is unsafe, and using a savings account has a psychological benefit: It's tempting to spend money in hand. A savings account, however, can be a means of setting aside funds to reach longer-term goals.

Key Takeaways
  • Because savings accounts pay interest but keep your funds easy to access, they’re a good option for parking cash you’ll want in the short-term or to cover an emergency.
  • In exchange for the ease and liquidity that savings accounts offer, you’ll earn a lower rate than more restrictive savings instruments and investments might pay.
  • The amount you can withdraw from a savings account is generally unlimited.
  • The interest you earn on a savings account is considered taxable income.

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