There are several savings account advantages and disadvantages. Three advantages of savings accounts are the potential to earn interest, it’s easy to open and access, and FDIC insurance and security. Three disadvantages of savings accounts are minimum balance requirements, lower interest rates than other accounts/investments, and federal limits on saving withdrawal.
If you’re fortunate enough to have extra money for long-termgoals, first, pat yourself on the back! Saving is so important and yet, sochallenging for most people. Next, figure out how to make that extra money workfor you. These days, there are so many ways to use, grow, and save your money,including good old-fashioned savings accounts.
Savings accounts are usually the first bank account thatanyone opens to put aside money for the future and create or preserve wealth.Children could open a savings account with a parent to develop a culture ofsaving. Teenagers open savings accounts to keep cash earned from home chores ortheir first job. A savings account is an excellent way to keep emergency cashfor unexpected emergencies or life events. The opening of a savings accountalso signals the commencement of the relationship between you and a financialinstitution. For instance, when you join a credit union, your membership isestablished by your “share” or savings account.
Many people ignore savings accounts due to the relativelylow long-term interest rates offered in comparison to other long-terminvestments. Before you decide, check out their advantages and disadvantages.
Savings Account Advantages
- Access and availability. Savings accounts are easy to open andyou can withdraw and deposit money anytime (within federal limits) at ATMs orvia 24-hour, online access, unlike long-term investment accounts. Many institutionswill allow you to link your savings account to other accounts, like a checkingaccount, which can help you to avoid costly overdraw fees. This also allows youto quickly transfer funds from one account to another.
- Protection. A savings account at a bank that is amember of FDIC, (Federal Deposit Insurance Corporation) insures your money forup to $250,000. If you use a credit union covered by NCUA insurance, youraccount is also covered up to $250,000.
- It’s a liquid asset. Savings accounts deal in cash, whichmeans you don’t have to worry about selling investments or making othercomplicated moves to access your money.
- Savings accounts accrue interest. Although interest rates have beenextremely low since 2007, you will still accrue interest over time with asavings account. The rates depend on the bank, but the national average isabout 0.09 percent, with high-yield interest rates of up to 2.05%.
- Low startup requirement. Many savings accounts can be startedfor just $25. Some institutions allow an account to be opened for as little as$1, so you can begin saving with even a modest amount.
- Automated bill payments. Many financial institutions allowbills to be paid automatically out of a savings account without being subjectedto the withdrawal and transfer laws, helping you avoid late fees or missedpayments.
- No lock-in period. You’re not locked in for any periodof time, which means you can switch savings accounts as often as you like.
Savings Account Disadvantages
- Minimum Balance Requirements. Most savings accounts have minimumbalance requirements or monthly maintenance fees. If your savings account fallsbelow the minimum balance requirement, the bank will deduct fees from youraccount, negating from interests you earned.
- Low Interest Rates. Interest rates are lower compared toother types of accounts or investments, such as money market accounts orcertificate of deposits (CD).
- Federal Withdrawal Limits. Due to Regulation D, savings accountshave federal limits when withdrawing funds, which is six times per month. Thebanks will charge you a fee if you exceed the federal limits, or they canchange your account from savings to checking accounts if you continue onwithdrawing more than six times per month.
- Access and availability. Yeah, we know this is in theadvantage category, too, but if you find easy access to these funds is too muchof a temptation, then that could make long-term saving difficult.
- Rates can change. Savings account interest rates arevariable, meaning that financial institutions are free to set and changeinterest rates as they wish. High-interest savings account rates will staylargely in line with the movements of the federal rate.
- Inflation. If your savings account doesn’t pay acompetitive interest rate, inflation could be eating up the value of yourearned interest, leaving you with an account balance that’s worth less a yearfrom now than it is in today’s dollars.
- Compounded interest. Most traditional banks or creditunions compound your savings account interest monthly, or even annually. Thismeans the full potential of your money isn’t always realized, especially whencompared to other investment opportunities.
Establish Good Saving Habits
If you wantto start saving, here are three tips to get you started on the right foot:
- Track your spending or get anelectronic app to help you do so. If you realize that you’re spending too muchon personal expenses or non-necessities, cutting back on those can give youmoney towards a savings account.
- Set up an automatic savings plan. Thisfeature automatically transfers a small portion of your paycheck into yoursavings account, so that you can “pay yourself first” and develop a habit ofsaving.
- Joint accounts. Consider opening a savingsaccounts with your partner so that you can save together.
Is a Savings Account Worth It?
The benefits of a savings account aren’t in how much you earn. Instead, you’ll want to consider the purpose of your account, and the liquidity and access you have. When it comes to your emergency fund, a savings account is likely the best choice. Some experts recommend having at least six months of living expenses in a savings account just in case, but even having a few thousand dollars in the account can help in a pinch. Consider also the specific savings account advantages and disadvantages before making a decision.
