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Savings accounts are one of the most basic and routine services offered by most banks. Banks often encourage patrons to combine checking and savings accounts into a package that includes automatic deposits each month from checking to savings. Savings accounts generally are a medium- to-long term place to preserve money, as opposed to an aggressive investment tool.
Although some people would argue that cash under the mattress is the safest way to preserve funds, savings accounts have a high level of safety. Deposits in accredited banks are insured by the Federal Deposition Insurance Corp. for up to $250,000 in most cases. This means that once your money is in your savings account, you can't lose it without taking action yourself.
Basic savings accounts offer a high degree of liquidity, which means you can easily withdraw funds for cash or to make payments. This is contrary to stocks, bonds, and investments that have penalties for early withdrawal or sale.
Savings accounts combine convenience with a modest interest rate that increases their value gradually. Online banking tools make it easy to move money between checking and savings accounts in a matter of moments.
Limited Investment Potential
A savings account is more for a conservative person rather than for someone looking to increase the value of his money. Savings accounts typically paid annual interest rates far lower than 1 percent as of early 2013. This is small compared with historic returns on stocks, gold, and even certificates of deposit.
Banks often have tiered accounts in which higher balances earn higher rates. But those rates typically are only a fraction of a percent more.
Not only is earning potential limited on savings accounts, you could end up paying the bank to hold your money. Banks often charge monthly service fees ranging from $5 to $25.
You can often have fees waived if you link checking and savings accounts with automatic deposit, or if you maintain minimum balances of $1,000 or $5,000. But people who can set aside that much money often look for higher-earning opportunities.
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