Savings and investment options vary significantly in restrictions and return on investment, but the most basic option is a savings account. Given the relatively low interest rates they pay, you may wonder why anyone would mess with a savings account. While other investment options potentially increase your income faster, the humble savings account offers distinct benefits.
The Federal Deposit Insurance Corp. insures the money in a savings account up to $250,000, which means your money is protected even if your bank goes under. Other investment and savings options, such as mutual funds and bonds, typically aren't FDIC insured, whether or not you purchase them through a bank. If those investments lose value due to changes in the market, your money isn't protected and you'll lose at least part of your investment.
A savings account gives you easy access to your money whenever you need it. The bank typically issues an ATM card to access funds in either your savings or checking account. Withdrawals from a teller at the bank or transfers from the savings to your checking account are other access options. Some investment maneuvers, such as selling stocks, require a more involved process to access money. Other options, such as CDs, may charge penalties for early withdrawal of money. A savings account eliminates fees and extra steps to get to your money when you want it.
Savings accounts usually offer very low interest rates, but the growth is safe. Many other investment options run the risk of losing your money or not having any growth. People often opt for the savings account to guarantee they don't lose any money.
A savings account is a suitable place for your emergency fund. This money serves as a backup if you need cash for a large or unexpected expense, such as a car repair or insurance deductible. You want your emergency fund in an account with immediate access and no penalties so you can get the money when you need it.
Large expenses, like a new vehicle, vacation or home remodel, often require saving for several months or years. A savings account provides a place to save for a specific goal. With the dedicated account, you can easily track your progress toward your saving goal. That money is kept separate so it isn't spent on other items.
Healthy Financial Habit
Saving is a healthy financial habit that all people should practice. By setting aside money on a regular basis in a simple format such as a savings account, you get in the habit of saving. You improve your overall financial stability as a result.
A savings account set up at the same financial institution as your checking account offers a form of overdraft protection. Most banks and credit unions allow you to connect the two accounts. If a check or debit from your checking account causes a negative balance, the bank automatically uses money from your savings account to cover the difference. The overdraft protection helps you avoid expensive fees.
A savings account is simple to start so you can start saving immediately. Many financial institutions allow you to apply online for a savings account, although you may need to stop in to show your ID or sign documents. Those who aren't comfortable with other methods of investment can start a savings account easily without a lot of research.
Minimal Requirements and Maintenance
Many savings accounts have no minimum balance and few requirements to keep the account open. You don't need to do any account maintenance to keep your savings going. Most savings accounts have the option of setting up automatic transfers from a checking account. This automated savings means you don't have to remember to transfer money to build up your financial cushion.
Multiple Account Option
Banks often allow you to open several savings accounts. This allows you to use the accounts for budgeting or saving for different purposes. For example, you might have separate savings accounts for vacations, gifts and general savings. Individual family members can each have a separate account for individualized savings.