So, you want to build an emergency fund for rainy days, save for near-term goals like say a vacation or raising enough money to pay for a house and you’re thinking of opening a savings account to help store the money over the given period of time you’ll be saving for.
Well, you’ve got a great plan but I’ll suggest that you don’t just go into the first bank or credit union you see without first taking the time to learn about the advantages and disadvantages of this personal finance tool. This way, you’ll know if it will give you great value in return for your money. If you then decide that it’s worth your time and effort, you can then make an informed and financially feasible decision.
Despite the fact that they provide some great benefits to the people that use them, you’ll be surprised to learn that they have some drawbacks as well. I’ve put together this article so that if you’re not sure where to begin, you can start by looking here.
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Advantages of a Saving Account
- Your money is safe always. The reason for this is because most of the credit unions and banks are insured which means the money that is deposited is secure and safe. Whatever happens in the near future, the money is still there and can be acquired.
- Savings account keeps your money liquid. You have access to the money that you deposit in a savings account at any time. This is very different from other types of accounts you can set up. In the case of an emergency, you can rest assured that you have access to all your money.
- It could be a means through which you can start investing. This account is not expensive to open at all. Once you’ve opened the account, you can start saving right away. Your money begins to earn interest. The interest you earn is determined by the bank and the amount of money you have in the account.
- Your money is insured. After depositing your money in the account, you can rest assured that the money is insured and safe. This is the reason why many people are interested in a savings account.
- It allows you to link with your checking account, which is great since this feature is incredibly helpful to a lot of people. Back in 2014, a survey was conducted by Novantas. 61% of the respondents actually said they transfer money from their savings accounts to their checking accounts when their balance is low. This way, they can cover shortfalls and avoid incurring overdraft charges and other fees.
- It allows you to automate bill payments in a case where you don’t have either a debit or credit card to automatically pay your bills every month. This way, you won’t have to worry about missing due dates and incurring late fees, and you have the assurance that you’re paying your bills with money you already have (instead of money you’re borrowing from your debit or credit card provider).
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Disadvantages of a Savings Account
- It takes time to process each transaction. At times, the transfer of money may be delayed for one or many business days. You may or may not have this problem depending on the bank you do the transaction through. The interest rates offered on a savings account is very low. This means that the rate at which your money will grow will be very slow.
- There’s usually a transaction limit on your account. Federal limits on withdrawals per statement cycle impede some of the liquidity benefits of a savings account. You can only access your funds a handful of times each month. Some banks are even more restrictive than the government requires, limiting you to fewer than six transactions in a statement cycle or charging fees when you exceed a certain threshold.
- You may have to pay account or maintenance fees to a bank with a savings account, particularly if you maintain low balances.
- You can be tempted to spend your money since you can withdraw from your account at any given time. Nobody can stop you from spending your savings whenever you want. This can really affect your savings plan especially if you keep spending on non-essentials like designer clothes or a new Smartphone. If you want to avoid the temptation of unnecessary spending, you can put your money in other long-term investments that come with a maturity date.
- Your bank or credit union will charge high fees if your savings fall below the minimum amount. This is a big deal if you spend from your savings account most of the time.
If your aim is to make your money grow, then a savings account is not the best thing for you. The interest rate is less than 1% per annum causing your investment to only see minimal growth and enjoy limited yields. Why not try putting your money in stocks, government bonds, mutual funds and other high-yield investment vehicles.
Although they don’t provide the same level of safety and security that savings accounts provide, you’ll enjoy high rates and earn more. If you just want to save money, then consider opening a savings account. They are good for emergency cases and future needs.