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Do You REALLY Need a Savings Account?
A savings account can keep your money safe and help it grow over time. Did you know over a quarter of Americans don’t have a savings account, according to a recent survey by GOBankingRates?1 That percentage is even higher among young millennials (aged 25-34), with 31% of this group lacking a savings account.
You may ask yourself why you need a savings account, especially if you already have a checking account. There are several benefits to having a savings account, such as growing your wealth over time.
Below we’ll dig into some benefits of having a savings account, and some items to watch out for.
Key Takeaways
A savings account could be a crucial tool when it comes to growing and protecting your wealth.
Some key benefits of having a savings account include FDIC insurance and the ability to earn interest over time.
There are a few things to watch for when choosing a savings account, like fees and minimum balance requirements.
Quick Savings Account Review
A savings account is an interest-bearing deposit account. Unlike a checking account that is used for day-to-day transactions, savings accounts are typically used to store money.
Historically savings accounts haven’t provided high returns, but the rise of digital banks has pushed many financial institutions to offer more competitive rates. In 2013, the national average savings account rate was 0.06% APY.2 As of May 15, 2023, the national average savings account rate was 0.40% APY. On the other hand, digital banks were offering rates as high as 5.00% APY.34
These competitive rates are making savings accounts more attractive options when it comes to storing and growing wealth.
Why Do I Need a Savings Account?
Opening a savings account is often an essential step in achieving financial stability and reaching your long-term savings goals. It offers a secure way to store your money while potentially growing your wealth over time.
Let’s take a look at some of the top benefits of having a savings account.
Protect Your Deposits with FDIC Insurance
Keeping your money at a chartered bank means it’s most likely protected by the Federal Deposit Insurance Corporation (FDIC). A chartered bank isn’t required to offer FDIC insurance, but most do. Check if your deposits are insured with the FDIC’s BankFind Suite.
FDIC insurance protects certain deposit accounts in the event that a bank fails. According to the FDIC, your deposits are insured up to $250,000 per depositor, per insured bank for each account ownership category.5
The FDIC has a tool called the Electronic Deposit Insurance Estimator that can help you determine how much FDIC insurance your deposits have.
When choosing a savings account, check to see if the institution is an FDIC member. There are some financial technology companies, often called neobanks, that offer savings products but, due to their lack of banking charter, don’t necessarily keep customers’ deposits in FDIC-insured accounts.
Often neobanks will partner with chartered banks to provide FDIC insurance by keeping customer deposits at the partner bank. Be a smart shopper and understand where your money is kept and how it may be protected before handing it over.
Quick and Easy Access to Emergency Funds
A savings account is also a good place to store your emergency fund (and a lot safer than keeping cash in your mattress).
While some may argue that having cash on hand offers you the quickest access to your money, in the digital age online payments and transfers are becoming more and more common. Additionally, if you keep money in your home, your homeowners insurance usually only covers cash up to a certain limit, usually ranging from $200 to $1000.6 This means if cash is stolen or destroyed, you may not be able to recover it.
Since money kept in savings accounts is easily accessible, you should be able to draw funds in the event of an emergency. Your money also has the ability to earn interest over time and may help curb temptation to spend.
Most banks allow customers who have both a savings and checking account to transfer money between the accounts almost instantaneously. This makes it possible to quickly move money between the accounts to cover purchases.
Grow Your Money with Interest
Another significant benefit of opening a savings account is the opportunity to earn interest on your deposits.
Money held in savings accounts earns interest over time. The amount earned varies by institution, depending on the Annual Percentage Yield (APY) offered. Banks use APY to describe how much the money held in an account will earn over a period of time, taking into account the effects of compound interest.
Compound interest is calculated not only on the initial deposit, but also on the interest the account earns over time. APY is expressed as a percentage and is generally higher than the stated interest rate because of the effect of compounding.
If you choose a savings account with a competitive APY, your money may grow significantly over time. For example, if you deposit $5000 into an account with a 4.50% APY that compounds daily, it will be worth approximately $5,230 after one year,7 assuming the APY remains the same throughout that time and no withdrawals are made.
This growth can help you both retain your spending power during spans of inflation and grow your wealth over time.
Curb Spending Temptation
Having money in a dedicated savings account instead of in your wallet could make it easier to curb spending impulses.
By keeping money at a bank, you have the opportunity to be more organized and compartmentalize your funds into various categories, such as your emergency fund or vacation fund. By separating your savings from the money you use for routine transactions, you have a better picture of how you’re tracking toward your financial goals.
A dedicated savings account may also help you resist impulsive spending. When you have money readily available, it can be tempting to make spontaneous purchases. By creating a small barrier between your spending and your funds, it allows you time to pause and consider a purchase.
If you still want to have money on hand for occasional indulgences, you may want to create a splurge category in your savings. This way you are able to set aside a specific amount of money for spontaneous purchases without impeding other goals.
Savings Accounts are Often Low-Risk and Free
Opening a savings account doesn’t usually require a large initial deposit and they’re one of the least risky accounts you can have.
Unlike investing in the stock market, where your money could lose value over time depending on market conditions, savings accounts don’t lose money, except when you make the choice to withdraw your funds.
If you select an account with low (or even no) minimum deposit requirement to open a savings account, you’ll keep even more of your money. Many investment accounts, on the other hand, have steep initial investment requirements that make it difficult to participate.
Saving Account Watch Outs
Just like any financial decision, choosing a savings account requires careful consideration and research. Here are a few things to watch for as you think about opening a savings account:
Minimum balance requirements: While many banks have done away with minimum balance requirements, some still have these in place.
Fees: Some institutions charge customers fees for different things, including maintenance, transfer, or not maintaining a sufficient balance.
Low rates: Depending on the institution, the APY on a savings account may be as low as 0.01%. With rates that low, it’s difficult to grow your money over time.
Tiered rates: Some institutions offer different rates depending on the balance in your account.
Bonus offers: Some institutions offer new customers higher rates or a “bonus” if they deposit a certain amount of money during a specified time period.
While banks may draw you in with flashy offers, make sure you read the fine print to avoid any surprises down the line.
Final Thoughts
While opening a savings account may feel unnecessary if you don’t have a lot of cash to store in it, it can be a great way to start growing your money over time.
Savings accounts may offer a secure and low-risk place to store your funds while keeping them accessible. Be sure to look for competitive savings account rates and watch for any fine print as you compare options.