Should I Open a Savings Account?

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Contributor, Benzinga
June 5, 2023

A generation ago, everyone had a savings account and benefitted from compound interest on their savings. These days, with so many savings account options available, it's easy to feel confused and wonder, "Should I open a savings account?" The answer is yes.

Savings accounts are as valuable as ever for building long-term wealth. They're not a replacement for retirement or investment accounts but are the best vehicle for short-term savings. Learn why you need a savings account here. 

The Purpose of a Savings Account

The purpose of a savings account is to keep money for a later date. These funds are separated from a standard checking account, where it could be too easy to dip into savings. Savings accounts allow you to access savings whenever needed along with interest-earning potential. 

A savings account is essential for financial security as it ensures you can cover unexpected expenses or emergencies. Many financial experts recommend keeping three to six months' salary in a savings account or emergency fund. Depending on your spending levels, you could also consider an extra emergency fund of $1,000 or more for vehicle repairs, emergency medical treatments and other unplanned expenses. 

Benefits of a Savings Account

Is a savings account worth it? Yes! The benefits of opening a savings account go beyond liquidity and ease of access. A savings account allows you to earn interest and more easily set and achieve financial goals. Here are the key benefits:

Build an Emergency Fund

Whether you have a single emergency fund with three to six months of expenses in a savings account or choose to have two savings accounts for different purposes, an emergency fund gives you security. It means that whatever emergency might crop up, from a vehicle breakdown to job loss, you’ll have your emergency savings within arm’s reach.

Save for Your Future

Savings accounts make saving for big financial goals like buying a house, vacations or weddings easier. You can also save for smaller goals like a new TV or car. While retirement accounts are better for long-term savings, savings accounts are potent tools for goals you plan to achieve within the next three to five years. A savings account ensures you don't accidentally spend savings on regular monthly expenses. 

Earn Interest on Your Savings

With a high-yield savings account, you could earn up to 5% annual percentage yield (APY). That's $50 free a year on every $1,000 in savings. It's better to earn something on funds than nothing. A savings account can make your money work for you, even while saving toward short-term goals. 

Risks of Not Having a Savings Account

Do you need a savings account? Also, yes! Savings accounts are important for everyone. Not having a savings account can mean you are stuck without a cushion when an emergency arises. It means you're more likely to need to put emergency expenses on a credit card or miss an important payment, hurting your credit score. A savings account can therefore help to increase financial stability. 

Potential Drawbacks of Opening a Savings Account

A savings account isn't a solution to all financial goals. The drawbacks center around lower interest rates than other investments and restrictions on accounts. Understanding these limitations, savings accounts are still crucial to financial diversification. Below are the cons of a savings account and why you still need one.

Lower Interest Rates Compared to Other Investments

A savings account typically offers a lower interest rate than an investment account like an indexed fund or real estate investment or in some cases certificates of deposit (CDs). It is also a no-risk investment offering maximum liquidity and is the best vehicle for short-term savings goals. 

Restrictions on Accessing Your Funds

The Federal Reserve no longer limits savings account withdrawals to no more than six withdrawals or monthly transfers from the account free of charge. But many banks still impose similar limitations. In most cases, if you're saving for a specific goal or making a single monthly withdrawal, these limitations won't affect you. 

How to Choose the Right Savings Account

Choosing the right savings account for your needs comes down to potential earnings and potential fees. Here's why:

Compare Interest Rates

Savings account interest rates range from 0.01% to 5%. Choosing a high-yield savings account with over 4% interest APY will ensure you effortlessly benefit from extra savings. 

Consider Fees and Minimum Balance Requirements

Fees and minimum balance requirements can reduce how much you earn. Some banks only offer high-yield APY if you maintain a certain minimum balance. Likewise, a monthly fee of $1 to $5 or more cuts into your savings and interest rate benefits. Look for an account with low or no minimum balance requirements and no monthly fees. 

Look for Account Features that Fit Your Needs

Whether you prefer a brick-and-mortar bank or an online bank is a personal preference. Look for a savings account that offers online banking, ATM access, a debit card, an app or other features that are important to you. 

Tips for Maximizing Your Savings Account

To maximize savings, below are some tips to effortlessly save more this year. 

Make Regular Contributions

Little deposits add up over time. Make a habit of depositing $20 a week, 20% of each paycheck or any other regular contribution amount. You'll be amazed how much you can save by focusing daily or weekly on savings. A savings account makes it easier to watch savings grow. 

Use Automatic Savings Tools

Automatic savings tools make it even easier to build savings. Set up an automation to deposit into your savings with each paycheck or at the end of the month. 

Take Advantage of Bonus Offers and Promotions

Bonus offers and promotions can help build your savings more quickly. Banks regularly offer promotions of cash bonuses for opening a new account with a minimum balance transfer. Likewise, they may offer higher deposit amounts at certain times or waive all fees. Find the best savings account offers now here. 

Alternatives to a Savings Account

You have options in addition to a savings account, including money market accounts and tax-advantaged retirement accounts that can become part of your financial planning.

High-Yield Savings Accounts

High-yield savings accounts function exactly like traditional savings accounts but offer interest rates of 3.5% to 5%. High-yield savings accounts are the best vehicle for short-term savings. Remember to check minimum balances and fees, as some high-yield savings accounts require a higher minimum balance for the most favorable interest rates. 

Certificates of Deposit

A certificate of deposit (CD) is issued by a bank for a specific amount of money at a specified interest rate for a certain length of time. CDs have fixed terms and durations. If you withdraw your money before the CD matures you'll face a penalty. 

Generally, you'll get higher interest rates for CDs of longer duration. You could choose six-month CDs, one-year CDs, 18-month CDs or any other duration such as three- or five-year CDs. The advantage of CDs is that they are fixed, safe and usually insured ways to save money. The disadvantage is that you'll face a penalty for withdrawing funds before maturation. 

Money Market Accounts

Money market accounts function like savings accounts. The critical difference is the accessibility of funds. With a money market account, you'll generally get a debit card and a checkbook to access your funds immediately. Most savings accounts don't offer debit cards to access funds. Money market accounts may also have lower minimum balance requirements. 

Tax-Advantaged Retirement Account

Tax-advantaged retirement accounts like a 401(k), individual retirement account (IRA) or Roth IRA are essential tools for long-term savings. As you'll generally be penalized for early withdrawals, these accounts are the best vehicles to maximize retirement savings. The notable exception is the deposited amount in a Roth IRA, which you can withdraw penalty-free before retirement age (59½). 

The advantages of retirement accounts are that you can maximize retirement savings with higher-yield investments, the power of compounding over time and tax advantages. Taken together, these are the best vehicles for building long-term wealth. But because of withdrawal penalties, they aren't a good choice for short-term savings goals. 

Investing Account

Investment accounts opened with a brokerage allow you to invest in individual stocks, indexed funds, real estate investment trusts (REITs) or other investment products. These offer higher risk than a savings account and greater volatility but can lead to higher returns. Work with a trusted adviser or consider investing in indexed funds to reduce risk. 

Is a Savings Account Worth It?

As long as you choose a savings account with low or no fees, low minimum balance requirements and high-interest rates, a savings account is worth it. It makes it easier to save for short-term goals and keep an emergency fund easily accessible. A savings account, along with other financial instruments, can help protect your family and build wealth, no matter what comes your way.

Frequently Asked Questions

Q

What is the minimum balance required to open a savings account?

A

The minimum balance to open a savings account varies by bank. Some banks will let you open a savings account with $25 to $100.

Q

How often can I withdraw money from my savings account?

A

How often you can withdraw money from your savings account depends on your bank’s policies. Some savings accounts offer unlimited withdrawals, while others limit withdrawals to up to six withdrawals per month.

Q

What types of fees can I expect to pay with a savings account?

A

Fees vary by bank. Common fees include monthly maintenance or service fees, excessive transactions fee, overdraft fee, insufficient funds fee, wire transfer fees or an early account closing fee. Look for a savings account with minimal monthly fees and be careful not to take actions that incur other fees. 

About Alison Plaut

Alison Plaut is a personal finance writer with a sustainable MBA, passionate about helping people learn more about financial basics for wealth building and financial freedom. She has more than 17 years of writing experience, focused on real estate and mortgage, business, personal finance, and investing. Her work has been published in The Motley Fool, MoneyLion, and she is a regular contributor for Benzinga.