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What is the purpose of a savings account?

To set money aside then raid it (I mean nickle and dime it to death) when I feel like it of course!! Wait, that's not you? Are you sure? How much do you have in savings right now?

Whats normal?

The average American cannot cover a $500 unexpected expense without using debt, if you can you're on the right track. Good job!

Back to our topic.

What is the purpose of a savings account?

Let's start with identifying what its not.

A savings account is not an investment account!

What is a savings account for?

A savings account is a safe place to hold money you may need quick access to, such as short term future purchases (TV, Phones, small vacations, Christmas, so on) a basic savings account is a great place to park these funds. In most cases, with this type of savings it doesn't matter where the money is held because it won't be there long enough to make more than a few dollars.

Another purpose of a savings account is to hold your emergency fund (this should be 3-6 months of expenses) in many cases this is anywhere from $15- $30K. On this account you should pay attention to the rate of return (it won't be good, but will be better then your local bank). Something like a Prime Money Market account is a good fit. Set it and forget it. NO YOU SHOULD NO HAVE THIS INVESTED!!! The purpose of this fund is to act like an insurance policy, so you don't have to touch your REAL INVESTMENTS, or make a bad situation worse by paying interest or worse. (Ever had a $3K emergency then had a job loss? It happens, You'll wish you had a cash emergency fund).

You should have a few savings accounts.

1. Everyday savings goals such as bigger ticket items.

2. Mini-Emergency fund (something like $500-$1000) linked to your personal checking account so you can get quick cash when needed.

3. A Prime Money Market account that holds your real emergency fund but will pay a little better return. Remember this is insurance, not an investment. call it bad luck repellent.


Savings accounts are just that, savings. That are created to save money, not invest money. Once you get out of debt and build an emergency fund, then you are able to start investing. That is the time to pay very close attention to returns, after all returns are one of then main reasons to invest. So have an emergency fund in savings to protect your investment making you money.

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