It’s a question that many people ask – what’s the point of a savings account?
After all, it seems like you could just put your money under your mattress and save yourself the hassle. But there are several reasons why a savings account is a good idea.
In this blog post, we will discuss the benefits of having a savings account and explain why it’s important for everyone to have one.
What’s the point of a savings account?
It’s helpful to have a savings account because it is a safe place for you to slowly grow your money, nearly risk-free at a modest percentage. This can help you to hedge against inflation, which grows at about three percent per year on average.
This means that if you just have cash, it will slowly become worth less over time as inflation goes up. Even worse, money in cash isn’t insured, so if something happens to it, you could lose everything.
These days, the percentage of return you get from a savings account is very low. However, this is still better than the percentage of return you would get from leaving your money in cash, which would lose value over time.
You may also be interested in: 12 Reasons Why You Should Save Money – Starting Today
A savings account also allows you to have fairly easy access to your money when you need it. This can be helpful in case of an emergency or if you want to make a large purchase since it only takes a few days to transfer and is usually penalty-free.
Some savings accounts also offer additional features, such as the ability to write checks or use a debit card connected to your account. This can be helpful if you want to avoid carrying around a lot of cash but still want easy access to your account.
Our pick: Best high interest savings account
Why? Well, because it’s got:
- 1.00% interest (over 11 times higher than the national average)
- No fees and only a $100 minimum deposit
- FDIC insured, meaning your money’s safe
Advantages of a savings account
While savings accounts are known as traditional financial tools, new life has been breathed into them in recent years. The following are some advantages of having a savings account in your money mix:
- A savings account is a safe place to store your money. Your money is insured by the FDIC (Federal Deposit Insurance Corporation) for up to $250,000 per depositor, per bank. This means that your money is protected if something happens to the bank.
- A savings account is a liquid asset. This means that you can easily access your money when you need it. You can typically make up to six withdrawals from your savings account per month without incurring any fees.
- They can help you spend less. When you have money in a savings account, you are less likely to spend it because it’s separated from your checking account and harder to access. There would also be a chance that you can save $1000 a month or even more doing this!
- A savings account can help you earn interest on your money. Recently, interest rates have been rising, and savings accounts are offering high interest savings almost twice as much in dividends as they were a year ago. This means more money in your pocket.
- They’re easy accounts to open. Unlike other types of accounts, such as a brokerage account or a 401(k), savings accounts have very few requirements. You can usually open one with just a small deposit.
- A savings account can be used as an emergency fund. Having a designated account for unexpected expenses can help you avoid going into debt if something unexpected comes up.
What are the cons of a savings account?
Even though having a savings account comes with a lot of benefits, there are also some drawbacks to consider:
- The interest rates are still low. Although rates have increased in recent years, they are still relatively low when compared to other investment options.
- You may be charged fees. Many banks charge monthly maintenance fees unless you meet certain requirements, such as maintaining a minimum balance or setting up a direct deposit. These fees can eat into your earnings.
- You may be tempted to spend. If you have easy access to your savings account, you may be more likely to dip into it for non-emergency expenses. This can defeat the purpose of having a savings account and leave you without funds.
- Withdrawals are federally limited. You are allowed to make up to six withdrawals from your savings account per month. If you make more than that, you may be charged a fee or blocked from the transaction altogether.
Is it better to keep money in checking or savings?
Money in a savings account generally sticks around longer than money in a checking account, making it the better choice if you have long-term savings goals. However, if you need to cover day-to-day expenses or have short-term savings goals, a checking account may be the better option.
It’s best to have a mix of both checking and savings accounts to give yourself the most flexibility. This way, you can easily access your money when you need it while still earning interest on your deposited funds.
Pro tip: You can set up a system where a portion of your paycheck is automatically deposited into your savings account so you’re less likely to spend it. It’s a great way to save money without having to do anything at all!
Having your checking and savings accounts both serviced by the same financial institution can also be helpful. Many banks offer perks, such as free ATM use or waived fees, for customers who have both types of accounts. It also simplifies your finances by keeping all of your accounts in one place.
Even if you don’t want to give a significant portion of your money to a savings account, try to contribute a small amount each month. This will help you get into the habit of saving and give you a cushion to fall back on in case of an emergency. The sooner you start, the better off you’ll be down the road.
How much cash should I keep in savings?
If your savings account is holding your emergency funds, it’s recommended to have at least 3 to 6 months of your living expenses saved. This will help you cover unexpected costs, such as a job loss or medical bills, without having to dip into other savings or go into debt.
Many people like to have up to 12 months of living expenses saved so they can feel even more secure. More than a year’s worth of savings may be better allocated into longer-term investments such as a retirement account, though, since it will be less accessible and may accrue more fees.
What if I don’t put my money into savings?
If you don’t have any pressing financial obligations, you may be able to get by with a smaller amount of savings. This is especially true if you have other sources of income, such as investments or a retirement account, that can cover unexpected costs.
There’s nothing wrong with keeping your savings in your checking account. This is more secure than cash on hand or other risky investments, and some checking accounts even earn interest.
Of course, you’ll want to avoid spending your savings if possible. If you have a hard time not touching your deposited funds, consider setting up automatic transfers into a separate account that’s less accessible.
This way, you’ll still have the money when you need it but won’t be as tempted to use it for everyday expenses. You can also try these great ways to save money without a bank account.
How much cash is too much in savings?
Having too much cash in savings is generally not a bad thing. In fact, it’s often recommended to have a healthy amount of savings so you can cover unexpected costs and have funds set aside for long-term goals. Many people save up to $100,000 or more in their savings accounts.
Once an account has accrued over $250,000, the surplus amount is no longer protected by the Federal Deposit Insurance Corporation (FDIC) in the event of a bank failure.
This means that if your bank went out of business, you would only be able to recoup up to $250,000 of your deposited funds. So, at this point, many find it best to move into other investments such as bonds or stocks.
Another way to determine the right amount of cash to keep in savings is by looking at your overall financial picture. This includes factors such as your income, job security, debts, and other obligations.
Your life goals are also important to consider. If you’re aiming to retire within the next few years, for example, you’ll want to put more money into low-risk index funds instead of keeping a large sum of cash in savings.
But if you’re younger and have fewer financial obligations, you may be able to afford to take on more risk. In this case, keeping a larger cash balance in savings may not be as detrimental to your long-term goals.
Find out more about: How to Calculate Your Savings Rate – and Why You Should
Can you pull money out of savings?
Yes, you can pull money out of savings at any time. However, this is usually a limited amount of withdrawals that you can make each month. Money will also take several days to transfer from your savings account to your checking account.
Some banks will charge a fee if you make more than a certain number of withdrawals from your savings account per month, so it’s important to check with your bank to see what their policy is.
Try to plan your withdrawals in advance so you don’t have to dip into your savings account more often than necessary. Not only will this help you avoid fees, but it will also make sure you transfer money at the right time so that you don’t have to wait for it to clear.
The most convenient way to pull out money from your savings account is by using your online banking portal or mobile app. You can also visit a branch in person to make a withdrawal, but this may take longer.
You’ll need to have your government-issued ID with you when you make a withdrawal from your savings account in person. This is so the bank can verify your identity and prevent fraud.
Can I use an ATM to pull out money from my savings account?
Yes, for many banks, you can use an ATM to pull out money from your savings account. However, there may be some restrictions on how much you can withdraw and how often you can do it. If you use the same bank for your checking and savings accounts, your debit card can usually access both when used in an ATM.
If you have a different bank for your savings account, you may need to get a separate ATM card from that bank. You can also usually link your accounts online so you can transfer money between them.
What happens when you withdraw from a savings account?
When you make a withdrawal from your savings account, the money is transferred from your savings to your checking account. This process usually takes a few days. You may be able to see the transaction in your online banking portal right away, but the funds won’t actually be available to spend until they’ve cleared.
This clearance can take a few days, depending on your bank’s policies.
Once the funds have cleared, you’ll be able to use them like any other money in your checking account. You can withdraw cash, write checks, or make purchases with a debit card.
If you’re not sure if the funds have cleared, you can contact your bank to check. They’ll be able to tell you if the transaction has been processed and when the funds will be available.