Savings account: advantages and disadvantages

21-11-2016 | Adriana |

savings accountIs having a savings account a smart financial move?

Many people still don’t trust financial institutions and are very reluctant to bank on them to handle their life savings. While the pun was intended, there is nothing funny about securing your own money.

In this day and age, there are so many financial products one can choose from, it’s difficult to say which ones are convenient, which have a negative impact on your finances or which are simply useless.

WHAT IS A SAVINGS ACCOUNT?

Saving accounts have been around for decades.

Who hasn’t dreamt at least once about winning the lottery and living off interest? Since most of us won’t have this happen anytime soon (not to mention the majority of the people who win the lottery squander the money in few months/years, living off the interest is still possible, if you save enough money in your account.

The definition is very straightforward: a savings account is a type of bank account where you securely deposit your money and wait for it to earn you interest.

HOW DO SAVING ACCOUNTS WORK?

You open a savings account and, each time you have extra money, you make a deposit and leave it there.

Meanwhile, the bank loans money to its other clients, charging a higher interest rate than the one they offer you for your savings account. The interest rate the bank pays you in return is their way of saying ‘thank you’ for you letting them lend your money to others.

This is, in very simple terms, how the banks stay in business. It’s all about how they handle money. Don’t worry though, they’re not actually lending YOUR money to others, you can access your funds if you need to, as long as you respect your contract’s terms.

SHOULD YOU OPEN A SAVINGS ACCOUNT?

To open or not to open a savings account? That’s the big question.

Over the years, many financial aspects have changed, so nowadays you should really do your research before deciding anything that could affect your financial future.

Judging by how savings account work, opening one up sounds like a great idea! But what if you could invest your money some other way?

What if you opened a checking account instead? Or what if your financial expectations are high, but in time, it turns out your savings account has a very low return?

Good thing we live in the information era, so you can thoroughly do some research before taking action.

HERE ARE 3 PROS AND CONS TO HAVING A SAVINGS ACCOUNT

Advantages to having a savings account:

1. Earn money in interest over time

This is the main idea of how savings accounts work: you deposit your money and, after watching the principal ‘grow’ for a while, the increase over the original amount is yours to keep!

The more money you add to your savings account, the more you earn in interest.

2. Protect your savings

Many people still use old-fashioned ways to save up money, but here’s a very interesting advantage to opening up a savings account: your money is legally safe!

If your bank is a FDIC member (and you should make sure it is), your money is insured. The Federal Deposit Insurance Corporation (FDIC) insures your deposit up to $250,000, which is the maximum amount allowed by law today.

In other words, if the bank should fail and go bankrupt, your money is insured, so you won’t end up broke.

3. Have an emergency fund ready

Having a savings account doesn’t mean you’ll only be able to access your money after years of waiting. Depending on the terms of your contract, you can access it a few times a month and you can even transfer funds into it by linking it to your checking account.

This means that, should you run into an emergency like, an unexpected bill, you forgot to pay your mortgage last month or your car broke down, you have a nice financial buffer to rely on, immediately!

Disadvantages to having a savings account:

1. Interest rates are very low

Although earning money while sleeping sounds great, the interest rates on saving accounts nowadays are significantly low.

Most banks in the U.S. offer around 1% interest rate, which is very little. In other words, for the regular Joe, this might just be the weakest way to ‘grow’ your income.

So, unless you have at least a few thousand dollars (or even more) to deposit, forget about relying on your interest rate to solve a serious financial emergency anytime soon.

2. Your money is only insured up to a certain amount

While having your money insured is great, insurance coverage is limited.

The whole point of having a savings account is to make your money grow. The more money you have, the higher the interest rate earnings.

However, should you exceed the maximum coverage set by the law, you’ll actually lose your full coverage. Which means you either have to juggle several savings accounts or think about other ways to invest your money.

3. Have an emergency fund… with limited access

Having money set aside for a rainy day is great and all, but the bank has legal rights too: you may be able to access your savings account only a few times per month, you have to respect the minimum balance required, you may have to pay a fee each time you withdraw and so on.

Depending on what bank you choose to trust with your savings, there will always be consequences to bending the rules of your contract.

Savings accounts were always a great way for people to save money on the long run. A lot has changed over the years though, and lots of other investment opportunities have appeared.

While having a savings account is still one of the safest ways to keep your money all in one place, if you’re thinking about opening one, it’s best to balance your pros and cons first.

What’s your take on opening up a savings account? Does having one benefit you financially?

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