Still, there are plenty of reasons to keep cash in a savings account. These reasons are only increasing as competition from internet-based companies drives up interest rates and forces banks to offer new convenient features. If you haven’t opened a savings account yet, here are the best reasons you should consider doing so.
Curb the Temptation To Spend
A savings account forces you to separate a portion of your funds from your everyday spending money. That alone can eliminate the temptation to spend cash you might prefer to save. Creating barriers to curb impulse spending can help you stick to monthly budgets and avoid debt. If buying a new video game is as easy as swiping a card, then you might not even consider the cost until the next time you check your bank statement. On the other hand, if you have to take the time to move expenses from your savings into your checking account before you buy, you’re more likely to be aware of the cost and the effect it will have on your overall finances.
Prepare for Surprises
A savings account is an excellent place to keep your emergency savings. Everyone should strive to stow away a sizable chunk of cash in case of an emergency. You’ll never be able to predict when your water heater or the roof needs to be replaced or when your garage door stops working; your car might need a major repair, or your employer could go out of business. When something like that happens, an emergency fund in your savings account makes it easier to land on your feet. It may be a stressful event, but you’ll be able to take it in stride. Without emergency funds, you could be forced to go into debt, sell your belongings, or make personal sacrifices that risk your health or safety to make ends meet.
Keep Your Money Safe
When you have more money than you need to spend immediately, it’s critical to keep that money safe. There are obvious risks to investments, but carrying cash comes with its own risks, as well. A bank or credit union is a much safer place for excess cash. Banks offer physical protection for your money, and FDIC-insured banks (NCUSIF-insured for credit unions) also address the risk of bank failures like identity theft, fraud, and bank errors. The U.S. government protects up to $250,000 per customer per institution. There are also federal laws to protect you against certain types of fraud and errors in your bank account, but you need to monitor your accounts and act quickly after something happens.
Save for Goals
Opening and managing a savings account forces you to organize your finances and makes it easier to plan for the future. However, even if you’re already planning for the future, it can be difficult to accurately track your savings progress if you keep all your money in a checking account. To help you organize and minimize fees, look for online savings accounts that let you set up multiple subaccounts. It may even make sense to have one savings accounts for each long-term financial goal. For example, you might have one account for emergency savings, another account for a vacation fund, and a third account for a down payment for a home. You would put any extra cash in these accounts to easily track (and ultimately reach) your goals.
Your Cash Is Accessible
Savings accounts are among the most liquid options for storing your cash. If you need to spend money, it’s easy to transfer funds to a checking account (transfers within the same bank are virtually instantaneous). ATMs will let you draw cash from your account just as fast. Conversely, other types of accounts like certificates of deposit (CDs) or investments in a brokerage account may restrict your ability to move money quickly. Although savings accounts are liquid, you should keep withdrawal limits in mind. Depending on your bank, savings accounts may have a limit on the number of transfers or withdrawals you can make per month—previously a rule enforced by the Federal Reserve’s Regulation D. In April 2020, the limit was removed because the Fed reduced reserve requirements at depository institutions to zero. However, banks can still impose limitations based on internal policies, so make sure you know if your bank has transaction limits for savings accounts.
Accounts Are Often Free
With the number of free savings accounts available, why wouldn’t you have a savings account? Online banks, in particular, allow you to open an account with no minimum balance, and they don’t charge monthly fees. There’s virtually nothing to lose by keeping a savings account open. Credit unions and small local banks also tend to offer free savings accounts. You may even find a welcome deal that pays you in exchange for opening an account (these kinds of deals usually require you to maintain a minimum account balance for a set amount of time).
Disadvantages of Savings Accounts
There are very few drawbacks to savings accounts, but it’s essential to understand them. The primary disadvantage to savings accounts is the relatively low interest rates your money earns. This is by design—they’re meant to be an alternative to a coffee can buried in the backyard or cash under the mattress. Additionally, the interest earnings generally don’t keep up with inflation. This means you lose purchasing power over time because your money is not growing at a rate that keeps up with rising prices. For example, $100 placed in savings today can buy a specific amount of goods. If you received no interest on that $100 and held onto it for one year, it wouldn’t buy the same amount of goods because prices generally rise every year. Savings accounts also provide consumers with loans. If you receive a loan from your bank, it is lending you money from other savings accounts. Other borrowers are also loaned money you have in savings. This banking method helps keep the economy growing and is why you’re paid interest. It is also why most banks can’t let you take out all of your money at once. Often, they need to borrow from another bank to allow a customer to close an account because the funds might be tied up in loans to other customers. For these reasons, you can have too much in your savings account. But how much should you save?
How Much Is Too Much?
It’s best to keep what you might need for specific purposes in a savings account. To figure out how much you should keep in savings, total up all the expenses you believe you might need to cover. There are many expenses that you should consider saving for after making sure you can pay your living expenses:
Emergency travel needsMedical billsCar repairsHome repairsAppliance replacementsVacationsJob lossOther expenses that could occur within six months
You should also account for how much you feel comfortable with having in savings. For example, you might only need $20,000 in savings based on calculations for your emergency fund and three to nine months of expenses, depending on your financial and living circumstances. However, you might not be comfortable with only $20,000 in savings and want $30,000 just in case. There is nothing wrong with this, as it also gives you peace of mind. Just make sure to remind yourself that the more money you have working for you, the less work you have to do to earn money—even when the market is down, it historically always comes back stronger as long as the economy is producing.
