With rising inflation happening across the country, it’s more important than ever to understand where to put your hard-earned money. While you may turn to investment opportunities such as mutual funds or government funds, one of the best places to start is a savings account.
Although you may be wondering if a savings account is actually worth it compared to other options, the answer is clear: yes, a savings account is worth your time and money, and there are many benefits to opening one.
What is a Savings Account?
Savings accounts are a type of bank account where you can store your money while it earns a percentage of interest, paid by the bank, over time. Often, you will not need this money in the coming months, but you still want to have quick and easy access to it without having to go through waiting periods to take out your money.
With most savings accounts, you can deposit money when you want and withdraw as needed, similar to a checking account. Although, there might be restrictions on how frequently you can withdraw. Some banks may only allow you to withdraw up to six times, based on the previous Federal Reserve Regulation D before it was suspended during the pandemic.
Anyone over the age of 18 can open a savings account as long as they provide the right documents and, depending on which bank, a small first deposit or fee. Minors are not allowed to open an account on their own; they must have a parent or guardian help manage the account until they reach adulthood.
Interest rates on savings accounts
The percentage of interest rate on savings accounts varies depending on the bank and type of account you have.
It should also be noted that the interest on savings accounts is not set in stone. When you open a new account, say under a high-yield savings account, that rate will fluctuate over time, depending on what the Federal Reserve sets interest rates at; savings account interest rates will mirror the changes. While this means your initial savings account interest rate may drop over time, it can also increase as well, allowing you to earn more than expected.
Why Keep Money in a Savings Account?
Aside from the obvious answer of “to save money”, most people will open a savings account with a goal in mind. This could be to save up for a new car or to keep emergency funds in quick reach. Some common reasons to put money aside in a savings account include:
- Unexpected Medical Bills
- Home Repairs
- Appliance Replacement
- Moving Expenses
- Job Loss
- Vacations
- Weddings
How much you keep in your savings account will depend on your income and what you are saving up for. Most experts agree to have at least three to six months’ worth of essential expenses in a savings account. However, that number could be impacted by several factors, and it’s best to speak to a financial advisor about what works best for you, your situation, and your budget.
Benefits of a Savings Account
Having a savings account is a crucial step in managing your money. While you may be tempted to keep everything in a checking account, having an additional savings account allows you to put money aside that can also earn some interest over time.
Although some savings accounts may not accrue high-interest earnings, there are still plenty of benefits and reasons why having a savings account is important to your overall financial health.
Easy to open
Some types of investments feel like you need a degree to get started, but savings accounts are easy to open. Most banks, like SouthEast Bank, can help you with the paperwork and set one up in no time, either in person or online, with the correct documentation.
Savings accounts are also relatively inexpensive to open. Some banks may require you to start with a set amount of money in it, but others offer free savings accounts with no minimum deposits.
Automatic savings
One of the best reasons to have a savings account alongside a checking account is the ability to deposit savings from your checking account to your savings automatically. You can take the money directly from your paycheck or have it pulled from your checking account on schedule. Even if it’s only a few dollars, it’s money that will add up over time with interest and help you reach your financial goals without even thinking about it.
Along with having the ability to save money automatically, savings accounts allow you to earn interest on the money you put into it or compound interest. Depending on which bank you use, the interest may compound monthly, daily, quarterly, or annually.
Your money is protected
You may know someone, yourself included, who likes to hide their savings around the house, maybe in a piggy bank or an old book. While that’s okay for a few spare dollars, not putting your money in a safe place could result in disaster.
Unlike other types of investments, savings accounts are federally insured ad FDIC banks, up to $250,000. This means if the bank fails, you will not lose your money. The protection from the FDIC covers individual accounts, so if you have both a checking and savings account in a bank, your money will be protected.
Future planning
Having a savings account allows you to keep some of your money separate from your checking account and away from accidentally using it to get that take-out.
With a savings account, you can easily put money aside for emergencies, vacations, or whatever else you are working towards in the future. They are easily accessible as well, allowing you to withdraw from the account as needed without having to wait a certain amount of time as you do with other investment accounts.
Drawbacks to a Savings Account
Putting money into a savings account is almost always worth it, but there can be some downsides to a savings account if you don’t find the right one.
For example, most banks require a minimum balance or monthly fees to keep the savings account. If your account falls below the minimum, it may charge fees against your account.
Other disadvantages to savings accounts include:
Low-Interest Rates – Traditionally, savings accounts have lower compound interest rates, meaning you won’t build a lot of money over time. However, there are many accounts available with higher interest rates.
Withdrawal Limits – Savings accounts usually have federal withdrawal limits on them, meaning you can only take out money so many times per month.
Changing Interest Rates – When you open a savings account, your interest rate isn’t locked in, meaning it changes constantly and could be lower than when you started.
Other Places to Save Your Money
If you’re not sure about the benefits of a savings account or want another opportunity to invest your money, there are some alternatives to savings accounts. Some of these may offer higher interest rates but may be harder to set up or access your money. Consider setting up one of these accounts alongside traditional savings and checking accounts to create a strong money portfolio.
Certificates of deposit (CDs)
Certificates of deposits are savings products that allow you to earn interest on a lump sum of money, similar to a savings account, but often with higher interest rates that can earn you more money over time.
Unlike a savings account, CDs cannot be touched until the end of their term, or you may face fees or even loss of interest. This is because when you open a certificate of deposit, you are locking in several items: the interest, the term, the principal, and which bank or credit union you will be using.
Opening a certificate of deposit is just as easy as opening a savings account, but be mindful that when you do, you will be agreeing to the terms of it, including how much money you will be depositing. Be sure to research carefully before signing up for a CD to ensure you are getting the best interest rate and a knowledgeable and friendly banking institution.
Money market accounts
Money market accounts, or MMAs, are offered by banks and credit unions and act as a hybrid checking and savings account with some limitations. They allow you to save money, as with traditional savings accounts, and accrue interest while also providing some of the benefits of a checking account, such as debit cards and check writing.
They are best suited for those with short-term goals in mind, such as for an emergency fund. Money market accounts may have limits on transactions and a minimum required balance.
Cash management accounts
Cash management accounts have been gaining popularity for their ease of use online. They work similarly to a traditional savings or checking account, where you can “park” your money but still have easy access to it.
The difference between a cash management account and a checking or savings account is that investment firms or broker-dealers run cash management accounts. While they offer many similar services to banks, they are not FDIC insured, meaning your money is not protected.
If you are interested in a cash management account, some may provide insurance through the Securities Investor Protection Program, but do your research before putting your money somewhere other than a traditional savings bank.
Is a Savings Account Worth It?
Despite other offerings available, a savings account is still worth it. They are basic but highly helpful, allowing you to save money for almost anything while having protection from the FDIC and earning a little interest over time. Unlike other investment opportunities, savings accounts are easy to open, with either a small deposit or no minimum deposit needed. Best of all, you can access your money whenever you need it.
If you are interested in starting a savings account or in learning more about protecting your money, contact South East Bank. We can help you get started.
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Information contained in this blog is for educational and informational purposes only. Nothing contained in this blog should be construed as legal or tax advice. An attorney or tax advisor should be consulted for advice on specific issues.
