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Savings accounts are interest-paying investments made in banks, credit unions, and other depositories.
For many people, they are a convenient way to store cash, because their 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 interest rates, they are not recommended for long-term investing.
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 banking, many financial institutions will charge penalties on some kinds of savings accounts if you do not maintain a required minimum balance.
Those who want a higher return and are willing to leave their money untouched have an option that we will discuss in the next section.