The Importance Of Saving is Higher Than Ever
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Life can be both unexpected and expensive. There can be unfortunate things like an untimely layoff, a flat tire, or a medical diagnosis. There can also be opportunities such as buying a house, going on a spontaneous vacation, or finally pursuing a lifelong dream. One financial tool can help you with all of these situations — a savings account.
What is a savings account?
A savings account is a financial product banks and credit unions offer to help consumers set money aside for the future. These accounts differ from checking accounts which are primarily used for everyday spending and bills.
Savings accounts, on the other hand, are designed for the future. Since they’re separate from a checking account and not connected to your debit card, ideally funds in your savings accounts are only used for their intended purpose.
You can use a savings account — or multiple savings accounts — to help you:
- Build an emergency fund
- Save for a vacation
- Prepare for unexpected expenses
- Fund a personal goal
One of the advantages of opening a savings account is that your deposits typically earn interest. The more you put away in savings, the more interest you earn.
Every consumer can benefit from having a savings account. Having a financial cushion available when you need it can offer peace of mind and help you avoid expensive debt. It can also help you pay for high-cost items like a vacation or repairing your car in full, without relying on loans.
More for Your Money: Say no to monthly fees.
How does a savings account work?
You might have a checking account that you use and know how it works. But how does a savings account work, exactly?
Typically, you open a savings account through a bank, credit union, or online financial institution. To get started, you’ll provide your personal information and an initial deposit to create the account. Some banks may require a minimum opening deposit of $25 or more.
Once your savings account is open, you can continue funding the account and your deposits will earn interest. The interest you earn depends on the Annual Percentage Yield (APY) rate and how much you have in the account.
If you need to use the funds in your savings account because of an emergency or you hit your goal to pay for your vacation, you can withdraw the money.
If you have a savings account at the same bank as your checking account, you can link the two so you can electronically transfer the funds. That way the money goes from your dedicated savings account to your checking account, where you intend to spend it.
Because a savings account should be for a rainy day or some other goal down the line, there may be withdrawal limits in place.
For example, pre-pandemic there was a rule that consumers couldn’t have more than six withdrawals from their savings accounts each month. However, in 2020 that rule was thrown out. Check with your bank and be mindful of how often you take funds out of your savings account.
What is a good savings rate?
A solid benchmark is a savings rate of 20% of your income. That percentage can get you on track to build an emergency fund that has three to six months or more worth of living expenses.
If that number feels higher than is possible right now, you’re not alone. As of November 2023, the personal savings rate of Americans was 4.1%, according to the Bureau of Economic Analysis (BEA).
Try to reduce expenses and save what you can. The importance of savings accounts can’t be understated but there’s a key part. Stashing money away — like the importance of eating healthy or exercising — is a long-term practice that requires consistency.
Advantages of opening a savings account
A savings account can help you prepare for the worst and have money set aside for the best. For example, unexpected repairs or expenses aren’t emergencies anymore with a savings account. If you get invited to a last-minute girls’ trip, you have the flexibility to say yes. In other words, you have options.
Here are the advantages of opening a savings account:
- Interest: Earn more with the money you sock away, thanks to interest accruing on your deposits.
- Flexibility: Savings accounts are highly flexible and can be accessed when needed, without penalties.
- Automatic transfers: Your bank may allow automatic transfers of a specific amount from your checking to your savings. That way, you can save money effortlessly.
- Protection: Deposits up to $250,000 in savings accounts are insured by the Federal Deposit Insurance Corporation (FDIC). So if your bank goes under, not all of your money will go with it. Make sure the bank is FDIC-insured.
- Safety: Savings accounts are a low-risk way to save for the future. While they don’t offer the same returns as investments, they don’t come with the levels of risk either.
More for Your Money: Say no to monthly fees.
What to look for in a savings account
If you’re ready to take the next step and open a savings account, there are plenty of options to choose from. But not all come with the same benefits. Here are some things to look for in a savings account.
- APY: The APY will affect how much interest you earn. Standard savings accounts generally offer much lower APYs than high-yield savings accounts. So compare rates and consider parking your money in a high-yield savings account.
- Minimums: Some banks may have minimum deposits to open a savings account or a minimum account balance.
- Monthly fees: If you fail to maintain a minimum account balance, some banks may charge monthly fees. Look for no-fee savings accounts, if possible.
- Convenience: See if the bank offers automatic transfers, easy withdrawals, or if it has any restrictions. If transferring from one bank to another, how long is the transfer time?
- Customer satisfaction: Research the banks you want to open an account with before moving forward. Type [bank + customer reviews] into your search engine and see what comes up. Are there common complaints or plenty of praise?
After looking at several options and comparing these features, you can decide the best savings account option for your needs.
