8 Pros and Cons of Savings Accounts
JA
Summary:
Savings accounts offer several advantages over other types of bank accounts, such as the security of FDIC insurance for up to $250,000 per depositor and the ability to earn interest on deposited funds. However, there are also some drawbacks to savings accounts. For instance, you may be only allowed to withdraw money from your account a few times a month before incurring fees. So before opening a savings account, weigh the pros and cons and decide whether it’s right for you.
According to data from the 2019 Federal Reserve’s Board Survey of Consumer Finances, the average American under 35 years old only has around $3,000 in savings. Unfortunately, that data is only for Americans who have checking or savings accounts. According to information from that same survey, 5.4% of households in the U.S. are “unbanked” and don’t have a checking or savings account.
If you haven’t put much effort into creating a savings plan, an easy way to start is by opening a dedicated savings account. By setting money aside each month, you can build a healthy financial cushion to cover unexpected costs or emergencies. And by choosing the right savings account, you can earn interest on the deposited funds.
However, just like any other interest-bearing account, there are pros and cons to opening a savings account. In this article, we’ll review what a savings account is, why it’s an important step in your financial journey, and the advantages and disadvantages of this account.
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What is a savings account?
A savings account is a type of bank account where you can deposit money and earn a small amount of interest on it. Because savings accounts accrue interest, they can be a great way to save for short or long-term goals — such as paying for college or buying a house.
Some savings accounts even offer special features — such as online and mobile access — making it easy for you to transfer money into your checking account or monitor your savings account balance. Plus, most financial institutions offer some form of customer protection so you can be sure your money is safe.
Pro Tip
Depending on the financial institution you choose to bank with, you can even opt for an entirely online savings account. Online savings accounts allow you to access your money without visiting a brick-and-mortar institution. However, this can also make it more difficult to access your funds quickly if the online savings account does not come with an ATM or debit card. So be sure to consider all aspects of an online savings account before you get one.
If you’re confident an online account is for you, take a look at some of the online-only savings accounts below.
Pros and cons of saving account
Here we’ll discuss the advantages and disadvantages of opening a savings account to help you make a more informed decision.
Pro Tip
Consider following the 50/30/20 budget rule to boost your savings. The rule goes like this: 50% of your income goes towards essentials like rent and food, 30% goes towards discretionary expenses like travel, and 20% goes towards savings.
How to choose the right savings account?
Deciding which savings account is right for you can be overwhelming. With so many options available, it can be difficult to know where to start. However, by asking yourself a few key questions, you can weed out the bad apples and find an account that fits your needs.
Here are some features to compare between savings accounts:
- Annual percentage yield (APY). This is the amount of interest you will earn on your deposited funds over the course of a year. Depending on the type of savings account you open, you may have an APY above 2% or merely a fraction of that.
- Fees. Some banks charge monthly maintenance fees or inactivity fees, which can eat into your earnings. However, some banks don’t charge certain fees, so be sure to compare how much you’ll pay in fees per account.
- Access. Many online banks offer 24/7 access through their website or mobile app, while traditional banks may not have this option. On the other hand, you can always visit a brick-and-mortar branch if your mobile app or internet isn’t working, which isn’t an option for online-only institutions.
By taking the time to ask these questions, you may find the right savings account for your needs.
Alternatives to traditional savings accounts
That being said, you may find that a traditional savings account isn’t for you. If you’re looking for a different location to park your savings, consider one of the below options.
Money market account
Money market accounts typically offer higher interest rates than traditional savings accounts, making them a good choice for people who want to grow their savings quickly.
In addition, money market accounts often have check-writing and debit card features, which can be helpful for those who need to access their money regularly. Like savings accounts, MMAs are FDIC-insured and can protect up to $250,000 for each account holder.
High-yield savings account
A high-yield savings account is a type of savings account that offers a higher interest rate than a traditional savings account. Some high-yield savings account offer tiered interest rates, meaning that the more money you have in the account, the higher the interest rate will be.
But in general, you can expect the APY of your high-yield savings account to be around 2% to 3%, which is much higher than the 0.21% APY of traditional savings accounts.
Certificates of deposit
A certificate of deposit (CD) is a low-risk investment option that holds a certain amount of money for a specified term length. You’ll typically see CDs with terms from a few months to several years. While the money remains in a CD, it earns a fixed interest rate — often upwards of 3% — which makes it a great tool for growing unused funds.
However, CDs do come with some downsides, including early withdrawal penalties lower overall yields compared to other investment vehicles. To compare different interest rates and term lengths, take a look at some of the CD accounts below.
FAQs
Is it worth having a savings account?
Savings accounts typically have lower interest rates, so you may not earn as much money on your deposits over time. Nevertheless, a savings account can still be a good option if you’re looking for a place to save money for short-term or long-term goals, such as an emergency fund or a down payment on a house.
Is it better to have a savings or checking account?
Both savings and checking accounts have unique benefits that can be advantageous depending on your needs. If you’re looking to store your money safely, a savings account is a great option. On the other hand, checking accounts are better if you need to make frequent withdrawals. So the answer to this question depends on what you value more: safety or convenience.
What is one downside of using a savings account instead of a checking account?
One potential downside to using a savings account instead of a checking account is that you may be subject to withdrawal limits. With a savings account, you typically can only make a certain number of withdrawals per month before you start accruing fees. This can be problematic if you need to withdraw money more frequently since you’ll end up paying more in fees than you would with a checking account.
Is a savings account safer than a checking account?
If you’re looking for a safe place to park your cash, a savings account is typically a good bet. Unlike checking accounts, savings accounts aren’t linked to a debit card, which means it’s more difficult for thieves to access your account.
Plus, most savings accounts come with built-in protections like a $250,000 FDIC insurance, which guarantees that your money will be reimbursed if the bank fails.
How much money should you keep in your savings account?
How much money you should keep in your savings account depends on a variety of factors, including your income, debts, monthly expenses, etc. If you have a steady income and no debts, you may be able to get away with keeping less money in your savings account. But if you have irregular income or high monthly expenses, keeping a larger buffer in your savings account can help cover unexpected costs.
As a general rule of thumb, financial experts recommend keeping three to six months’ worth of living expenses in your savings account. This way, you’re better prepared for anything life throws your way.
Can your money grow in a savings account?
Yes. Though traditional savings account interest rates are quite low, you can opt for high-yield savings accounts to accrue more interest. Most high-yield savings accounts offer 2% to 3% APY — 10 to 15 times the national average rate for standard savings accounts.
Also, by increasing the amount you’re stashing away each month, you can offset the effects of low-interest rates on traditional savings accounts.
Key Takeaways
- Savings accounts are protected by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per insured bank.
- Though interest earned in your savings account is quite low (unless you open a high-yield savings account), your money can still grow compared to putting it away in a checking account.
- Opening a savings account is easy since most banks only require a small deposit to open one.
- Some institutions still enforce withdrawal limits for savings accounts. If you exceed this limit, typically six withdrawals, your bank can charge you a hefty fee.
- Many banks have minimum balance requirements of around $300 to $500 for savings accounts.
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