A savings account is a bank or credit union account that holds cash and pays interest. Savings accounts are FDIC insured up to $250,000 per depositor, per bank, which protects your principal if the bank fails.
Savings accounts are meant for money you may need on short notice, such as an emergency fund, rather than long-term growth. Because the funds stay liquid and low-risk, savings accounts typically pay less than investments like stocks or bonds.
Interest on a savings account is expressed as an annual percentage yield, or APY, which reflects both the interest rate and how often the account compounds. Compounding means the interest you earn is added to your balance, so future interest is calculated on a larger amount.
Savings account rates vary by institution. Large traditional banks tend to pay less, since they carry higher overhead costs. Online banks and credit unions tend to pay more, since they carry fewer overhead costs or operate as nonprofits.
Some savings accounts have minimum balance requirements or monthly fees. Reviewing an account's terms before opening it can help you avoid losing interest to fees.