A savings account is a safe place to store cash that you may need in the short term. You can open an account at nearly any bank or credit union, usually completely online and with only a small or even no initial deposit. These accounts reliably pay stated interest rates and most have modest fees while some charge no fees. However, the interest earned on savings accounts is too low to keep up with inflation, raising the question of whether a savings account is worth owning. Even so, most Americans use savings accounts, and they offer important benefits. One Financial Advisor can help you establish budgeting and saving habits.
Savings account basics
One saving account is an account type offered by a bank or credit union that pays you interest in exchange for using the money you deposit. These financial institutions use the money in savings accounts to lend to individuals and businesses.
Nearly all banks and credit unions, including online banking, offer savings accounts. You can Open a savings account by filling out an application and making a deposit. Usually you can do this completely online and sometimes without depositing any money to get started.
Savings accounts charge a low service fee, usually just a few dollars a month. Some savings accounts do not charge a monthly fee. Savings accounts typically allow withdrawals by online transfer, using an ATM card, or going to a bank. However, they are different from checking accounts, which are also offered by banks and credit unions.
Checking accounts, some of which also pay interest, are designed to be used to pay bills and make frequent withdrawals. Savings accounts, on the other hand, often limit how often you can withdraw to a few times per month or less.
Savings account interest rates are often much lower than the returns investors can expect on stocks and similar investments. Currently, many large banks offer an annual percentage rate of only 0.01% for savings accounts. High interest savings account offered by some smaller and online banks that may pay 2.0% percent or more.
Deposits in savings accounts are considered to be absolutely safe from being lost. That’s because savings deposits are insured by Federal Deposit Insurance Corporation. No one has ever lost money from an FDIC-insured account. However, this safety comes at a cost. That’s because the low interest rates paid on savings don’t allow savers to keep up with inflation. Money put into a savings account will usually loss of purchasing power overtime.
Many savers use savings accounts to emergency savings and to accumulate money for short-term goals or to make big purchases, such as down payment for a home. Because a savings account is separate from the checking account used to pay bills, many savers find it easier to avoid impulsive spending.
Savings account Pros and cons
To help you evaluate the benefits and advantages of a savings account, here is a list of key features:
Savings account pros and cons Pros Cons High security Low returns High liquidity Loss of purchasing power Segregated from other funds Less available than checking
Remember that not all savings accounts are created equal, and each of these accounts may apply in different ways to different accounts.
Best use for a savings account
A savings account is probably the best place to keep emergency savings. These are savings, ideally one to three months of basic expenses, that are retained in the event of an emergency such as a costly repair bill. The segregation and high liquidity offered by savings accounts make them well-suited for this purpose.
Savings accounts are also a good way to accumulate money for short-term savings goals that will come due within three years or so. Prepaying a home, buying a new car, wedding or vacation are common short-term savings goals when using a savings account. Savings accounts are better for accumulating money for short-term needs than other investments, such as stocks, because there’s no risk of the account’s value dropping as soon as the money is needed.
People who have very low take risks are also good candidates for savings accounts. Investors who fear high losses may keep more money in a savings account than other investors, simply for peace of mind. However, even savings accounts are not entirely risk-free, given the possibility that funds will lose purchasing power in the future due to inflation.
Key point
A savings account is a convenient, safe, low-cost place to accumulate savings for emergencies or major purchases. However, the low interest rates they pay mean inflation will eat into the purchasing power of the currency they hold. Balancing these pluses and minuses shows that keeping some, but not all, of your money in a savings account makes sense for most people.
Saving tips
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A financial advisor can help you decide how to use a savings account in your overall strategy. Finding a qualified financial advisor is not difficult. SmartAsset of free tools connects you with up to three financial advisors serving in your area, and you can interview the right advisors for you for free to decide which one is right for you. If you are ready to find an advisor who can help you achieve your financial goals, start right now.
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Savings accounts are considered cash equivalent for the purpose of asset allocation. However, physical money is not the same as money in a savings account. Bills and coins can be stolen, lost or destroyed, while money in a savings account is safe from this type of loss. Hiding money under a mattress or even in a locked safe isn’t as secure as using a savings account — plus a savings account at least yields some interest.
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