The quest for financial security is a journey with adventurous twists and turns as sought after as money itself. It usually starts with putting away hard-earned cash. A reliable option for you to store money is to deposit it into a savings account, which is a safe way to save and earn interest. The account can help you save money for both short-term and long-term goals. But are savings accounts worth it, and what other options do you have?
What is a savings account?
A savings account is a bank account that helps you save money and earn a percentage of your savings as interest. You can open a savings account at a bank, credit union, or other financial institution. The more money you have in your account, the more interest you’ll earn.
MoneyLion offers a convenient marketplace to compare high-yield savings accounts from our trusted partners that could help grow your money.
Advantages of a savings account
Savings accounts have a number of benefits. Here are the most common ones.
1. Safe and secured
Savings accounts are usually insured by the government so if the bank fails, your money would still be safe. In the United States, savings accounts are insured by the Federal Deposit Insurance Corp. (FDIC) or National Credit Union Administration (NCUA) for up to $250,000 per account type per person.
2. Interest earnings
When you deposit money into a savings account, the financial institution pays you interest on the balance you maintain. Over time, the interest earnings can add up and help your savings grow faster. The interest rates may vary from one institution to another.
3. Easy to open
You don’t need a huge amount of money when opening a savings account. Many banks and credit unions let you open a savings account with as little as $25.
Unlike long-term investments that tie up your money for a specific period, savings accounts are flexible and liquid. Regulations used to limit the number of withdrawals per month, though that regulation has been lifted. Currently, the specific withdrawal frequency allowed may vary depending on the institution. The ability to access your savings accounts makes them valuable when you need money for emergencies and other short-term expenses.
5. Automatic savings
Some banks allow for recurring transfers from your checking account to your savings account. You only need to decide how often and how much money you want to transfer. This automatic savings setup helps you stay consistent and build your savings over time.
6. Financial discipline
When you have a savings account, you separate your savings from the money you use for everyday spending. Keeping your money separate makes it easier to resist the temptation of spending your savings on impulse buying. Instead, it encourages you to focus on your savings goal and regularly save money toward it.
Limitations of a savings account
Here are some of the drawbacks to consider before opening a savings account.
1. Service fees and charges
Savings accounts may have fees and charges. These charges can include monthly fees to keep your account open or fees if you make too many withdrawals. Make sure to evaluate all the fees and charges of any savings account you are looking to open to understand your payment obligations.
2. Opportunity cost
When you keep your money in a savings account, you should also think about what you might be missing out on. Savings accounts are safe because they are FDIC-insured for depositsdepsosits up to $250,000. However, other financial products could offer a higher interest rate. It’s important to do the research to see what option is best for you.
3. Potential Withdrawal Restrictions
Another potential limitation of some savings accounts is the restricted access to funds. Some savings accounts have withdrawal limitations, which can range from a certain number of monthly transactions to penalties for early withdrawals. While this restriction is meant to encourage individuals to save and discourage impulsive spending, it can become an issue if you need immediate access to your funds in case of an emergency or an unforeseen expense.
What should you use a savings account for?
Below are some of the best reasons to put money in a savings account.
1. Emergency fund
When something unexpected happens, you can easily access the money in your savings account to help cover the costs. You can use emergency savings for car repairs and medical bills without getting into debt.
2. Short-term goals
With a savings account, you can set aside money specifically for short-term goals. These goals may include going on a vacation, buying a new car, or getting a new appliance.
3. Irregular expenses
Expenses like annual insurance premiums and property taxes can catch you off guard if you’re not prepared. With a savings account, you won’t have to rely on loans and credit cards when such expenses come up.
4. Capital for investments
When you save up a substantial amount of money, it can give you the chance to invest in stocks, bonds, or other investment opportunities.
5. Major purchases
Saving for major purchases is a smart move that can help you avoid excessive debt and save on interest payments..
6. Education expenses
Taking out student loans can lead to a lot of debt. A savings account can help you build up funds to help cover the costs of tuition, books, accommodation, and other educational expenses.
7. Retirement Savings
Retirement accounts like IRAs or 401(k)s are commonly recommended for long-term retirement accounts. But a savings account can serve as a complementary tool. It provides a place to store additional funds for retirement or even act as an emergency fund during retirement.
Other alternatives to save your money
While a savings account is a common way to save money, it’s not the only option available to you. Here are other alternatives to consider.
1. Certificates of deposit (CDs)
When you open a CD, you agree to keep your money in the account for a specific period. In return, the bank guarantees a fixed interest rate for the duration of the CD. Certificates of deposit often provide higher interest rates compared to regular savings accounts.
2. Money market accounts
Money market accounts are a type of savings account that combines features from both savings and checking accounts. You can deposit and withdraw money from a money market account while earning interest on your balance.
3. Cash management accounts
With a cash management account, you can deposit money and earn some interest, just like a savings account. You can also write checks, make transfers, and use a debit card to access your money easily.
Choosing the Right Financial Path
Opening a savings account is a great way to reach your financial goals. The trick is to be consistent and keep saving regularly. Remember, savings accounts aren’t the only option out there. Depending on what you want to achieve, it’s worth exploring other alternatives. With the right information, you can choose the savings approach that suits your needs and helps you achieve your financial dreams.
How much money should you keep in a savings account?
The amount of money you should keep in a savings account depends on your financial situation and goals. The specific amount will vary based on factors such as your income, expenses, and personal preferences.
Are there any tax implications for the interest earned on your savings account?
There are tax implications for the interest earned on your savings account. The interest earned on savings accounts may be subject to income tax.
Is it better to keep your money in a savings account or invest it?
Whether it’s better to keep your money in a savings account or invest it depends on your financial goals and risk tolerance. Consider your financial objectives or consult a financial adviser to determine the best approach.