Budgeting

The Pros and Cons of a Savings Account

There are lots of steps to managing your money properly. And a good financial profile should include a plan to save money. Whether it’s college tuition, a dream vacation, or retirement, savings accounts help us realize our goals by funding them.

A savings account can also act as an emergency fund to help you avoid creating more debt. Before you decide what is best for you, let’s look at the pros and cons of a savings account.

What Is a Savings Account?

A savings account is a deposit account at a bank or credit union account that stores your money. You can get a savings account at just about any brick-and-mortar financial institution.

Because they are supposed to hold money for a long time, savings accounts typically come with restrictions on how much or how often you can withdraw money and transfer funds without paying a monthly fee.

Most savings accounts accrue interest. Savings account interest rates vary from bank to bank. As a consumer, you want to shop around for savings account with the best interest rate so that you can make the most off of your money.

A savings account can also help you deal with unexpected expenses. Many borrowers without savings turn to online personal installment loans when they’re in a bind. But if you have money set aside, you won’t need to.

Federal Deposit Insurance Corporation (FDIC)

Did you know that your savings account comes with insurance?

The Federal Deposit Insurance Corporation, also known as the FDIC, was created by Congress in 1933 after the run on banks during the Great Depression caused many of them to fail. The FDIC’s job is to help maintain the stability of the nation’s financial system by insuring bank deposits for American consumers. Additionally, the FDIC examines and supervises financial institutions for safety, soundness, and consumer protection; makes large and complex financial institutions resolvable; and manages receiverships.

What does the FDIC’s protection mean for you? It means that the money that you deposit in a savings accounts is there when you need it. If you bank with a federally insured financial institution and it fails, the FDIC guarantees your savings account deposits up to $250,000.

With the majority of all banks now offering FDIC coverage, many consumers now face less uncertainty about their deposits. As a result, banks have a better opportunity to address problems under controlled circumstances without causing a panic that scares people into rapidly withdrawing their money.

There are financial institutions that are not members of the FDIC. The federal government does not back the accounts in these banks and credit unions. Financial experts strongly advise consumers to check their institution’s these banks and credit FDIC membership status before they open a savings account with them. It’s easy to spot: look for the “member FDIC” bank logo wherever you want to deposit your savings.

Types of Savings Accounts

There are three types of savings accounts, each with advantages and disadvantages:

Regular Savings Account

The savings account with which you’re most likely familiar. It allows easy access to your money and earns interest. Your savings account balance will grow safely, steadily, yet slowly.

Online Savings Account

An online savings account is available through an internet-only bank.

Online savings accounts follow the fundamental structures of regular banks and allow direct deposit by taking pictures of checks and online transfers. They offer reasonable interest rates and minimal fees but lack a personal connection with regular bank/customer relationships.

Money Market Account

A money market account is a high-interest account that allows check writing and debit card privileges. Although they act like checking accounts, they have savings account features and restrictions—like minimum balances requirements. The ideal account has no monthly fees and a low minimum balance.

Certificate of Deposit

A certificate of deposit (CD) is an account that requires you to hold money in it for a certain amount of time. CDs come with term limits that range from a few months to five or more years. During that time, your money earns a much higher interest rate than a regular savings account. CD interest rates remain locked until the end of their term. That’s great for security, but it also prevents your money from benefitting from an overall rise in interest rates. Additionally, you cannot withdraw from a CD before the end of the term without paying a hefty penalty.

Difference Between a Savings Account and a Checking Account

You should use your savings account and checking account differently. A checking account is for accessing your money for everyday needs by using checks or a debit card.

While checking accounts are “spend” accounts, savings accounts are better used to grow your money. They don’t provide quick access to your funds—which will typically earn more interest than sitting in a checking account.

Knowing the difference, and how each one works is crucial. Having a bank account will even make it easier to get loans.

Should I Link My Checking and Savings Accounts?

It is a good idea to keep your savings account in the same bank as your checking account. Having multiple accounts at the same bank or credit union often entitles customers to perks like unlimited transfers and low monthly maintenance fees.

However, linking your checking account with your savings account has its advantages and disadvantages.

You may find it easier to manage two linked accounts. When they are connected, you will have the ability to send transfer money between your checking and savings accounts easily and quickly.

On the other hand, having too much access to your savings account could be a bad idea. With the option to dig quickly into your savings, you may decide to make purchases that you can’t afford.

In the end, the choice to link the two accounts will come down to how much access you want to your savings. But, the less you touch your savings account, the more money you’ll have when you need it.

Advantages of a Savings Account

A savings account gives you a place to put your money apart from your regular spending money. Savings accounts come with security features and insurance that will protect your money for you.

Remember that with a savings account, your money is making money. Interest brings the best benefit to your money if you don’t touch your savings account for a long time and make regular deposits.

The money in your savings account remains liquid. So if you need to make a withdrawal from your savings account, your money is immediately available.

Disadvantages of a Savings Account

While the availability and reliability of a savings account are excellent, it is not the option that earns you the most significant return on your investment. Stocks, bonds, and Treasury bills will earn much higher returns.

Some savings accounts come with rules for minimum balances, which means that you have to replace any withdrawal that puts you under the required minimum.

Savings accounts do not offer fixed interest rates. Your financial institution has the right to alter the rate as they see fit.

And although the money in your savings account is liquid, that accessibility may be a problem. If our money is readily available, we are more likely to spend it.

Conclusion

The advantages and disadvantages of having a savings account can mean different things to different people. But, having some cash reserve for the times ahead is essential to living a healthy financial life.

Savings accounts are a great way to manage that kind of reserve. Be sure to study all of the savings options available to you. And most importantly, pick a savings account option that you can stick with. The best thing you can do for your future is to start planning for it right now.

And if you need more information on how to open a bank account with bad credit, check out the rest of the CreditNinja Dojo!

References:

Federal Deposit Insurance Corporation
Savings Account Definition – Investopedia