What is a Savings Account and Why You Need One
- A savings account is a safe place to build the money you need to reach important short and long-term financial goals.
- Not all savings accounts are created equally.
- Choosing the right type of savings account is important, but not as important as choosing any and building savings.
Why Open a Savings Account?
Saving money is a cornerstone of good financial health. There are a number of reasons to save up money. And you need somewhere to put the money. A savings account is a basic solution. You can open one easily, your money in the account is protected from loss, and you can withdraw it quickly if you want.
Savings Account Gives Safety and Security
A savings account is a safe place to keep your money, by itself a good reason to have one. A piggy bank worked for you when you were a kid, but using one now or keeping your savings in the mattress or the refrigerator is no solution. A savings account at a bank or credit union protects your money from being lost stolen.
Your money is not going to disappear if the bank goes belly-up. During the Great Depression, some banks closed leaving some customers empty-handed and unable to get back the money they deposited. The federal government put in place insurance that protects the individual account holder’s funds. That risk is gone. Currently, most savings accounts are insured by the FDIC for up to $250,000.
Find the Right Place to Open a Savings Account
An important part of building savings is having your money in the right type of account. Pay attention to the interest paid (the APY- annual percentage yield). Also review the minimum amount you need to open the account and, whether the account charges any fees. Use the Bills.com Savings Rate Table to see some savings account available in your area.
Money Market Accounts (MMA)
There are variations on savings accounts that differ slightly. One common type of account you can use to build savings is a Money Market Account (MMA).
Funds you deposit into a Money Market Account are also protected by the FDIC guarantee, same as basic savings accounts. MMAs also allow easy access to the funds in your account, the same as standard savings accounts. Both MMAs and savings accounts limit account activity, to comply with Federal Regulation D, but the limit should not impede your ability to access your funds when you need them, as the restrictions are not severe.
Both savings accounts and MMAs may require you to maintain a minimum balance to keep the account active without a service fee. The minimum required balance is generally higher for an MMA.
MMAs come with check-writing, unlike savings accounts, which makes it easier to spend the money or use it for some purpose that is not your primary reason for building savings. A higher interest rate that may come with an MMA is not going help you further your savings goal if you spend the money.
The average interest rate of a Money Market Account is higher than the average interest rate on savings accounts. That doesn’t mean that you should open an MMA. You can find savings accounts that offer higher interest than some, or possibly even all Money Market Accounts, depending on what is available in the market when you are opening an account. Products and rates change, so stay informed. You could open an MMA because it offers the highest interest you can find on a savings account, and six months later, a bank offers a savings account at a higher rate. Stay informed of what is available and move your money, if you see a real advantage in doing so. The Bills.com savings account rate table is a free and easy way to see what interest rates are offered on savings and MMAs available in your state.
When you choose between a savings account and a Money Market Account, you want to compare these features:
- Interest rate. How much will your money earn? It is reasonable to aim for the highest interest you can find for an account that meets your other needs.
- Minimum balance. Understand what is required to open your account. Some accounts have $1 minimum balances and others as high as $10,000. Consider whether keeping the minimum required prevents other important financial goals. It could be foolish to choose a savings account because it earns you interest that is 0.3% higher if it requires keeping a high minimum balance. The money you tie up in the account could be at the cost of not having insurance that protects you and your family or accomplishing some other financial goal. Pay down high-interest debt before you commit to a savings account with a high minimum balance.
- Fees. Some accounts charge monthly fees, some wave the fees if you maintain a certain balance, and others charge no feels.
- Access. Are you using the account for more than building up savings? How often will you need to use funds in the account? Savings accounts limit the number of withdrawals so be sure that you have an idea of how you will use the account before choosing one.
Dedicated Savings Account
There are a lot of different reasons to put money in a savings account. Sometimes, you save money to spend on a specific purpose, such as paying for Christmas presents, taking a vacation, or buying a major appliance. Setting up a new savings account just for that purpose, then watching your savings balance rise feels good. You see the progress you are making towards your goal, each deposit getting you closer. Save responsibly, and the payoff is enjoying your well-earned reward of spending the money as you planned.
Saving for Long-term Goals
Building savings for substantial purchases take a long time. If you are saving up for a down payment on a home, it can take years of disciplined saving to build up enough money. Saving enough money to buy a car for cash or to make a big enough down payment to give you a reasonable monthly loan payment on a car loan.
There is even a type of savings that you put money in with the hope you don’t have to use, an Emergency Fund. Better the money stays in that account then you need to use it. Still, accumulating six months of living expense in your Emergency Fund takes time and safe place to keep the money.
Make Saving Money a Habit
A savings account helps you build up money safely. The process of saving also helps you build the discipline of saving. Do it enough, and it becomes a habit. Many employers will help you set up a direct deposit that puts some of your paycheck directly in a savings account. The money in your savings deposit account is yours as much as the money in your checking account you use to pay your bills. You can raid either account whenever you want. However, simply keeping the money separate makes it less likely that you will do so.
Get the Most Out of Your Savings
Whatever the reason you are saving money, you need to find the best place to put it. All the reasons above are good ones. Another factor to consider when opening a savings account is what the money you put away can do for you, not when you spend it, but while it is in the savings account. The money you deposit is used by the bank or credit union to make money. The money you hold in a savings account at a bank or credit union is used by them to make money. They make loans, for instance, charging a higher interest rate on the money they lend than they pay out in interest to savings account holders.
For the past ten years, the interest paid on traditional savings accounts dropped to the point where many banks were paying less than .1% in interest. That means for every $1,000 you have in your account you would earn just over a $1, with the compound interest. No one expects a savings account to pay high interest, but one-tenth of one percent?
Some savings accounts now offer rates over 2%, though there are also banks and credit unions with .1% rates. At 2% interest you are not going to make you rich, but using the same $1,000 example as above, you would have $20 instead of a wee bit more than $1. The key to finding the best savings account is to shop around.
Check Your Financial Health Score
Building up savings is one important part of good financial health. Take the Bills.com Financial Health Survey and see how you score in all four key areas: Spending, Borrowing, Savings, and financial Planning.