Savings accounts are what take your finances from surviving to thriving. You CANNOT begin to build financial freedom and wealth without saving some money somewhere. If you’re new to finances, figuring out where and how to store your saved money can be confusing. And honestly, when you Google it, it feels like every link or article is trying to sell you something. So, I’ve waded through the noise to bring you a simple TLDR.
you need to know these financial terms first. I will reference them in this article
- Risk: When it comes to finances, this is the likelihood that you will lose your money. Low risk is a lower chance of loss. High risk is a higher chance of loss. Nothing is no risk – even that money in your mattress can get stolen by a burglar.
- Accessibility: This is how easily you can access a financial service. In-person banks are highly accessible because you can go to the bank and talk to a person pretty easily.
- Liquidity: This is how fast you can access your money when you need it. Your normal bank account is completely liquid because you have access to spend this money 24/7. The money you have in your house is not liquid at all. If you have to access that money, you have to sell the house.
- APY: This is the annual percentage yield, or the total amount of interest you earn in an account over one year. APY includes the interest you are gathering over time (compound interest), and simple interest does not include any interest over time. For example, $10 at an APY of 10.00% would give you $11.05 after one year. A simple interest of 10.00% on $10 after one year would give you $11 even (no 5¢ bonus).
If you keep reading to the end, we’ll touch on one account that is not a typical savings account but can be a great asset in the game of building financial freedom.
A quick disclaimer: All of the information here is according to my own finances and what has worked for me for the past 13 years. Your financial needs and priorities might be different based on your own finances. And remember, this is a blog to learn about financial information. I am not your financial advisor and cannot guarantee any financial results. There also might be affiliate links on this page, but I will NEVER recommend anything that I do not personally use and love.
Traditional Savings Account
These are the savings accounts that you typically open alongside a checking account when you open bank accounts for the first time. Now, it’s been a long time since I’ve opened bank accounts at a bank, but the one I opened when I was 16, had to have a checking AND savings account. It was just a bank rule because I had a “student account” at the time. It is important to note that you don’t HAVE to keep a savings account attached to your checking account, but it might not be a bad idea.
This type of savings account is low risk because it’s insured by the federal government. If your bank fails, the federal government will make sure you get your money back (up to usually $250,000). It is also highly accessible (just walk into your bank and talk to a person) and highly liquid (pull cash out at any ATM or use your debit card).
If you haven’t read the 5 Bank Accounts You Need post in this series (Finance for Beginners), I’m going to put a quote here explaining why this account SHOULD NOT be used for a large amount of money. You can read more about it in that post if you’d like.
“I bank at Truist (not sponsored and don’t necessarily recommend this bank over others), and my savings account is currently earning 0.01% APY. That means I get $1.00 if my bank account has $10,000.00 in it all year. Meanwhile, the 2024 inflation rate was 2.89%. That means my $10,000 lost about $288.81 of worth in the same year.”
I, personally, only use my traditional savings account at Truist for one thing: to prevent overdrafts. If I need to pay for an emergency hospital bill right then, I can transfer money in seconds from my Truist savings account to the linked checking account. Then, I usually transfer that balance from my emergency high-yield savings account into my traditional savings account to keep my Truist savings account at $300 all the time. I don’t ever use the $300 just to buy things I can’t currently afford. That’s how you keep yourself poor, my friends.
High-Yield Savings Account
This is the type of savings account that you need to not sleep on. Instead of losing money, this type of account grows with a much higher APR than a traditional savings account. It will not only keep up with the inflation rate (yearly rise in cost of living expenses like gas, groceries, rent), but it will keep you AHEAD of it.
This type of savings account is also low risk because it’s also insured by the federal government (up to usually $250,000). How it differs from traditional accounts is that it is not as accessible (these are usually online-only banks, so you’ll have to call customer service with a question) and not as liquid (transferring money between a high-yield account and a checking account might take 2-3 business days).
I’ve actually used Wealthfront for this type of savings account since 2020. For me, I already had my Roth IRA at Wealthfront, and I MUCH preferred to have everything in one place. At the time I created my high-yield Wealthfront accounts, I was getting a 5.00% APR. Now, it’s at a 4.00% APR, which is still one of the highest out there. On one of my accounts, I made $92.45 of interest alone in 2024. All I did was leave money in the account and replace it when I had to use it, and I got $92 basically for free.
I also like Wealthfront because they offer a same-day transfer. When I need to access my money, it’s a lot faster than other online-only banks. There is no transfer number limit. There is also no minimum or maximum for their accounts. AND their customer service is some of the best I’ve had to deal with. They actually get you to a person if you need it, unlike most never-ending automated banking phone loops. AND my Wealthfront accounts are insured up to 8 MILLION dollars. Million with an M.
If you’d like to open a Wealthfront high-yield savings account, you can use this code: HERE. Both of us will get an extra 0.50% APY bonus for 3 months once you fund your account! Win-win!
Personally, I use my Wealthfront high-yield accounts for my emergency fund and my sinking funds (Don’t know what these are? Go back and learn what these accounts are in our previous post here).
Money Market Accounts
Money market accounts and high-yield savings accounts are essentially the same thing. They are actually used almost interchangeably in today’s financial world. They both offer way higher APYs compared to traditional savings accounts.
A money market account is also low-risk and is federally insured (usually $250,000). The big difference between a money market account and a high-yield savings account is liquidity. Money market accounts have either a debit card or a checkbook attached to them. That way, you have access to your emergency fund, for example, right when you need it. It makes them more liquid.
This can really be a catch-22 for some people, especially if you are new to saving.
When you have access to this type of account, you are tempted to use it for non-emergency things. Honestly, the more you have to work to get your money out of a long-term savings account, the better for your financial health (and freedom, one day).
The Wealthfront high-yield savings accounts that I have can be converted to money market accounts with the click of a button. If I wanted, I could get a debit card for my emergency or sinking funds, and none of the other details on the account would change. It would still earn me 4.00% APY. HOWEVER, knowing myself, I DO NOT want immediate access to my long-term savings. If it is important enough to go through the hassle of transferring the money, it can wait for the next day. I have never ever encountered a situation where I couldn’t transfer the money and then pay whatever I needed to pay.
Certificate of Deposit (CDs) Account
I actually explained this type of account really well in the last post, so I won’t go into too many details here.
TLDR: low-risk (federally insured), no or low liquidity.
You cannot take out this money when you want to. You have to leave it in the CD for the whole time you signed up for, or you get penalized. But, you don’t have to get a long-term CD. They can be as little as 3 months long. The best way to use CDs is in a CD ladder.
For example, if you have $500. You take $100 and put it in a CD for 1 year, $100 and put it in a CD for 2 years, $100 and put it in a CD for 3 years, and so on until 5 years. After that, every time a CD ends, you take that money and put it in another 5-year CD. Now, you have CDs with money and interest ending every year. You can put your yearly CD back into another CD or keep it out.
Maximize Your High-Yield or Money Market Savings Accounts
This is the biggest principle of long-term savings: Put money in the account and leave it there as long as possible.
In the last post, we discussed having at least $1,000 in your emergency fund and then starting to plan for building up to 3-6 months of essential expenses in that account. I’m going to talk you through how to get that number.
- Tally up all of your necessary expenses. This is ONLY what you need to survive. Not even to be comfortable! Just to survive!
For me, that is going to be mortgage, car payment, groceries, gas, daycare, and basic utilities. Ours is roughly $4,000 a month. This means I should have $12,000 (3 months) to $24,000 (6 months) of emergency fund savings in a high-yield savings account. We personally shoot for 3 months of savings because mine and my husband’s jobs are both pretty stable, so we don’t feel that it’s a risk for us.
- Save aggressively until your emergency account gets there, and take advantage of compounding interest over time!
I know that number feels impossible, but trust me when I say that little actions make a big impact. Throw absolutely all extra money into this emergency account until you get to this number. We’re actually working on building ours back up after Hurricane Helene f*cked us (pardon my German).
If you CANNOT see yourself being able to get to this number eventually, keep reading the Finance for Beginners Series because budgeting (your best friend in achieving your financial dreams) is up next!
Also, grab a savings tracker freebie here when you sign up for our weekly newsletter!
Bonus! Using a Roth IRA for Looooooong-term Savings
Now, I’ll go ahead and tell you: financial experts are NEVER going to recommend what I’m about to tell you. And honestly, if you don’t know a dang thing about savings, just skip this part of the article for savings and go straight to our Roth IRA for Beginners post coming soon.
A Roth IRA is a savings account for retirement. You should primarily use it as a savings account for retirement. AKA: put the max amount in and DO NOT think about this account until you are retiring.
However, it is important to note that you can pull out the money you’ve put into this account. There is no penalty for this. There is only a penalty if you try to pull out interest you’ve earned. What this means is that, technically, this is a high risk, low to no accessibility, and low to no liquidity savings/ investment account. I’m sure you’re wondering why I, Kathleen, the woman trying to show you how to build wealth and financial freedom, would tell you this.
There is one important exception where I might recommend you take money out of this account: using it for a down-payment for a house.
We don’t have enough time here to get into how a Roth IRA works, so you can read more about it in our Finance for Beginners post about Roth IRAs that’s coming soon. But, essentially, my Roth IRA has earned a lifetime interest of 70.11%. Yep, you read that number correctly. It’s a far cry from the 4.00% that I’m getting in my high-yield savings account. That is why, in some cases, I actually do advocate for using the Roth IRA like a savings account. You just have to think about it as a long, long, long, long, long-term savings account.
Do Something Right Now!
Even if you don’t use a Wealthfront account like me, look up a good high-yield savings account or a money market account and open one! Right now! Time is really your biggest asset with accounts like this because your money will start growing for you.
If you open a Wealthfront account today with $100, get 4.00% APY, and put in only $100 every month for the next five years, you’ll have $6,753.12. This might not sound like much, but you would’ve only put in $6,100! That’s $653.12 that you got for free! So please, start now and watch it grow.
Continue learning with the next post in our Finance for Beginners Series here. This one’s about budgeting!
If you would like to see a tutorial about how to set up any of these accounts or if you have any questions, please comment below! We’d love to hear from you!
