Benefits of Savings Accounts: Need to Know
By Braden Smith | August 22nd, 2018 | Banking, Savings Accounts
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Banks often say savings accounts are one of the most beneficial tools they offer, but what makes them so good? We’ll explore what a savings account is, why you would use one, the pros and cons, and the risks associated with having a savings account.
What is a Savings Account?
A savings account is a popular banking product that allows for the safe storage of cash when it’s not being used. Generally, all banks and credit unions are federally insured by either the FDIC or NCUA for at least $250,000. If the bank was to fail, your money would be safe. Savings accounts should typically not be connected with any recurring subscriptions or deposits as some financial institutions may have penalties for the amount of transfers being made to the account.
Why Do I Need a Savings Account?
Aside from having an everyday checking account to receive a paycheck and pay bills every month, it’s best to make a habit of saving money. Using a separate account to save money can be helpful because it creates a distance between the everyday spending and the cash meant for a later date.
Most savings accounts will even yield an interest rate on the money being saved in the account, earning you money for simply doing nothing.
What are the Advantages of Savings Accounts?
A savings account offers a place to store extra money. While a checking account is great for everyday money, a savings account will allow for money to be isolated in an account where deposits are not regularly made. This allows for the account holder to see how much money has been saved over time. Having a separate account can allow for the saving of money for particular goals such as an emergency fund, new car, or a vacation. Everyone has different goals, and savings accounts can be very useful for that purpose.
Some financial institutions offer an online banking platform to easily transfer money, Learn more about online banking.
Money is Insured by the Federal government. If a financial institution were to fail had its money stolen, deposits on checking and savings accounts would be insured by the Federal government. Individual accounts at banks are insured by the The Federal Deposits Insurance Corporation (FDIC). Accounts opened at credit unions are insured by the National Credit Union Administration (NCUA). Both the FDIC and NCUA will insure individual accounts for at least $250,000.
Minimal balance and yearly fees can be absurd. Some financial institutions will require a certain amount of money be placed within the account to avoid charging the account holder a minimum balance fee. Some will even charge a yearly maintenance fee and should definitely be avoided. Why pay to keep your money in the bank when many financial institutions will pay a high interest rate?
While savings accounts both have pros and cons, they are ultimately very useful for saving money that’s not needed immediately. Earning free money on the cash sitting in a savings account can be rewarding, but no financial institution offers a large reward for this task alone. Account holders may need to invest in treasury bonds or the stock market to see a favorable return on their money. Those not inclined to take risks can enjoy their small interest rate, while more risk-oriented investors can earn much more by using their money in other places.
What are the Disadvantages of Savings Accounts?
Some financial institutions offer low interest rates. Depending on the issuer, an interest rate could be as low as 0% or up to an incredible 1.90%. The national average savings account interest rate was a measly 0.08%, meaning for a one-thousand-dollar deposit, it would only yield 80 cents. Horrible, but now compare that to 1.90%, yielding $19.18, which would allow for the account to appreciate over time and beat inflation.
Savings accounts don’t yield the highest interest rate. While money sitting in a savings account will yield a small interest rate, investing can be a better option for those who don’t necessarily need all of the money in the account. Purchasing 12-month treasury bonds can yield up to 2.3%, while investing in the broad market index such as the Dow Jones or S&P500 can yield up to 10% on average. While the treasury bonds are secured by the U.S. Government, other investments may incur loss.
Everything in the financial sector is about risk and reward, where as incurring less risk will likely yield a lighter return. Using a savings account requires no degree of risk and is completely safe.
Federal transfer and withdrawal limits can be annoying. The Federal government limits savings account holders to six transfers per month. Savings accounts should be used to save money, where transfers should be less frequent, and money should be left alone until needed. On the flip-side, a transfer limit can restrict the amount of money flowing out of the account, helping the spending habits of the account holder.
Minimal balance and yearly fees can be absurd. Some financial institutions will require a certain amount of money be placed within the account to avoid charging the account holder a minimum balance fee. Some will even charge a yearly maintenance fee and should definitely be avoided. Why pay to keep your money in the bank when many financial institutions will pay a high interest rate?
While savings accounts both have pros and cons, they are ultimately very useful for saving money that’s not needed immediately. Earning free money on the cash sitting in a savings account can be rewarding, but no financial institution offers a large reward for this task alone. Account holders may need to invest in treasury bonds or the stock market to see a favorable return on their money. Those not inclined to take risks can enjoy their small interest rate, while more risk-oriented investors can earn much more by using their money in other places.
Are There any Risks Associated with Having a Savings Account?
Savings accounts are subject to both financial and systemic risk. When a savings account is open, there is always the possibility of having an account compromised by an attacker, in which money is stolen. If the account holder acts fast enough, the money is recoverable, but if too much time has passed, the money is lost. As one of the least common occurrences, banks and credit unions could potentially fail, causing widespread panic for account holders. There’s no need to worry because the FDIC and NCUA have insured depository accounts for at least $250,000 each.
Some banks will charge $25 per year if a minimum balance cannot be met. Others may even charge a $4 to $10 monthly fee for not meeting minimum balance requirements. Always do research.
Another example of a financial risk associated with a savings account could be the amount of fees charged for opening the account, maintenance fees, closing fees, and annual fees. A lot of these charges can be avoided by doing some research to find out what financial institutions currently charge. While this is not necessarily a risk of losing money, it’s a risk of spending money on unnecessary costs.
