You won’t earn a fortune if you keep all your hard-earned cash in a low-interest savings account. Still, a saving account safeguards your money so that you have easily accessible funds in case of unexpected expenses. These accounts are quick and easy to set up and encourage the discipline of saving toward your goals. They are safe and secure, so you won’t risk losing money.
If you don’t have a savings account, it’s time to consider your options.
Understanding the different types of savings accounts
There are four main categories of savings accounts.
1. Traditional savings account
A traditional savings account is designed to help you save and earn interest. Financial institutions like banks and credit unions offer these types of accounts.
A traditional savings account will provide you with a safe haven for your money. The savings will earn a small amount of interest while in the account. Savings accounts carry little risk because government-backed deposit insurance covers $250,000 of funds per person per account type.
These accounts are best for people wanting to set aside funds for short-term or emergency needs. They also cater to those who prefer a conservative savings approach.
2. Certificate of deposit (CDs)
A certificate of deposit (CD) is a time deposit account. When you invest in a CD you agree to keep your money with a financial institution for a fixed period. In return, you earn a fixed interest rate on your deposit. CDs usually earn higher interest rates than traditional savings accounts, but the funds are locked in until maturity. The time to maturity can range from a few months to several years.
CDs suit people who want to save for a particular goal and don’t need immediate access to their funds. They are a good option if you can commit money for a defined period and want a predictable return on your investment. Generally, longer-term CDs earn higher interest rates.
3. Fixed Annuities
Fixed annuities are insurance products with a guaranteed rate of return. Insurance companies sell these products. You can buy a fixed annuity with a lump-sum payment or a series of payments. In return, the insurance company will pay you interest on your investment for an agreed period. These products suit people who want a stable and predictable income stream in retirement.
The interest rates on fixed annuities depend on the insurance company and prevailing market conditions. Fixed annuities can offer higher interest rates than traditional savings accounts and CDs.
4. Money market accounts
A money market account (MMA) combines the features of checking and saving accounts. MMAs also offer higher interest payments than traditional savings accounts. They offer check-writing capabilities and debit card access. Many institutions require a higher minimum balance to open and maintain an MMA.
MMAs suit those who want to earn slightly more interest while still having access to their funds. Interest rates depend on market conditions and the financial institution involved.
Advantages of low-interest savings accounts
Low-interest savings accounts have several advantages.
1. Easy accessibility
Easily access your funds without worrying about penalties or restrictions with a traditional savings account. Easy liquidity makes these accounts useful in an emergency.
2. Low or no minimum balance requirement
You can open a savings account even if you have little money. Most banks do not require minimum balances. Those that do generally have a low balance requirement.
3. Low risk
With low-interest savings accounts, your deposit is stable and secure.
The Federal Deposit Insurance Corp. (FDIC), an independent U.S. government agency, provides deposit insurance for certain savings products. FDIC insurance covers several deposit accounts, including savings accounts, checking accounts, CDs, MMAs, and some retirement accounts. The insurance protects your deposited funds to a limit of up to $250,000 per account type (individual, joint, etc), per individual.
Disadvantages of a low-interest savings account
While low-interest savings accounts have their advantages, they also have some limitations.
1. Low returns on investment
Lower interest rates will return a modest amount on your savings, so your money won’t grow as quickly as it would with higher-yield accounts.
2. Inflation risk
Inflation refers to the general increase in prices over time. Inflation erodes purchasing power. If the interest earned on a low-interest savings account is lower than the inflation rate, your savings won’t keep up with rising prices.
3. Opportunity cost
In choosing a low-interest savings account, you could miss out on the higher returns available through other savings options. If you have a longer time horizon and can take on more risk, other savings may offer higher returns.
4. Limited withdrawal options
Some financial institutions impose withdrawal limitations on savings accounts. The purpose of setting limits is to preserve liquidity and discourage you from using your savings for day-to-day transactions.
Low-interest rate accounts provide a safe haven
Low-interest savings accounts may not offer the allure of high financial growth, but they do serve a purpose. They provide a haven for emergency funds and can help to develop the financial discipline to save for special occasions or medium-term goals.
Will my savings account interest rate change over time?
Savings account interest rates typically change over time as they are often linked to central bank interest rate decisions.
Can a savings account help me reach my financial goals?
A savings account can help you to meet your financial goals. It provides a place to preserve money for emergencies, and you can grow your savings to invest in riskier, higher-earning assets later.
What are the disadvantages of savings accounts?
Some disadvantages include low returns, inflation risk, opportunity cost, and limited withdrawal options.