In today’s fast-paced way of living, we are used to getting what we want instantly, especially if we worked hard for it. From gadgets to fashion, there are definitely a lot of material things that attract our attention. And in our busy lives, we seem to forget to heed some sound advice on financial independence. Delaying gratification so you can save for rainy days seem to be a thing of the past now.
But there comes a time that we do think more about our future, and decide that it is time to to start setting aside a little bit of our income. And then comes the tricky part. How to go about it? When each month it seems there’s not even enough left to put away. One of Warren Buffet’s nuggets of wisdom on saving money would come to mind, as he advises to put aside money first before spending, instead of saving from what’s left after spending. He also emphasized on learning how to save properly, starting early and making it a habit.
Based on this way of thinking, it is a good idea to open a savings account. A savings account is an interest-bearing deposit account offered by banks and other financial institutions. And they usually offer low interest rates, a savings account is a risk-free way of starting the habit of saving your money.
How a Savings Account Can Help You
When trying to save money, it is a good idea to keep it out of sight so you won’t be tempted to spend it. But at the same time, if that is your emergency cash, it should be accessible enough that you can easily withdraw it. Opening a savings account is a solution for both of these needs.
So, that said, savings account is:
- A product offered and held by third-party banks. Which makes it easier to keep your money safe somewhere and you won’t be tempted to spend it. It is a great way to start saving hard-earned money that you don’t want to spend immediately.
- An interest-bearing asset that is virtually risk-free compared with other options. Though the interest is low, you will receive some interest on your money, instead of keeping them in your cash safe or non-interest-bearing checking accounts. Making a savings account a great place to start building your emergency fund or saving for bigger investment goals.
- highly liquid and accessible which means you can withdraw anytime, anywhere (subject to federal limits on the number of withdrawals – in the US it is 6 withdrawals per statement month). Liquidity or the ease of using an asset as cash is quite important if you don’t intend to keep it as a long-term investment. This way, you can use that spare cash in times of emergency or to supplement your needs when you’re running short. Other higher-earning instruments are much more restrictive, holding your funds for certain periods of time.
The points mentioned above should be enough to convince a novice to stash money in a savings account. But if not, it’s good to note other benefits of using a savings account:
Savings accounts are insured which mean you’re covered for your deposit balance in case the bank folds or goes bankrupt. This is an edge over other riskier instruments which are not covered by deposit insurance.
Ease of transfer
With today’s banking technology, aside from it is very convenient to withdraw by ATM 24/7, you can also transfer funds electronically via online or mobile banking. This makes it easier to manage your funds like checking accounts, and pay your bills online.
Having your savings account linked to your checking account means you’re able to earn interest on your savings account and just transfer funds to your checking account as you need it. Or on the flip side, transfer excess funds from your checking account to savings account so it will earn interest instead of sitting idle in your checking account. Some banks even offer these products together such that your checking account automatically gets funds from your savings account. Being able to manage your finances online helps you avoid costly penalties and surcharges. Talk about efficiency and convenience.
If the points above don’t demonstrate a savings account’s flexibility, another great perk is you can open more than one savings account. This is useful if you have multiple financial goals like saving for that holiday vacation, dream house, emergency fund or building your long-term investment nest.
Because savings accounts are insured and low-performing that essentially there’s no risk at all, it makes for a safer nest instead of stashing away in your home where robbery and other disasters are a possibility.
Minimal placement and maintaining balance
You can easily open a savings account as it requires a small amount of money to invest in, as well as to keep in the account. As long as you keep your balance above the minimum requirement, you will avoid any penalties and your account will earn interest. Unlike other investment instruments with much higher money requirement.
The above-mentioned benefits all boils down to a sense of security that you have something kept away to rely on in case of emergencies or urgent need. If there’s a medical or family emergency, you can breathe easier knowing that you have enough funds to use.
Though there are many advantages of keeping a savings account, there are also some disadvantages.
- Savings accounts earn a much lower interest than other instruments like certificate of deposits and treasury bills. Though the banks use money to turn around through lending, they give low variable interest rates because depositors can withdraw it anytime and savings account rates cannot be more than the rate they earn from loans. Hence, it is not a good idea to use savings account for long-term investments as you would lose out on earnings if you would choose other types.
- You have to keep a minimum balance in your savings account to earn interest, as well as to avoid surcharges and penalties. It is always best to know your bank products’ details to avoid potential losses. You wouldn’t want your account balances eaten up just because you neglected to keep your accounts above the minimum.
- The accessibility of a savings account funds can also be a weak point, if you cannot overcome the temptation of using it more than you should. Other instruments are much more restrictive and funds are held for longer periods of time, unless you are willing to pay hefty charges for claiming them too early or before maturity.
All points considered, the pros of opening a savings account still outweigh the cons. And the disadvantages actually serve as points to consider if you want to take your savings to the next level. You can opt to invest in other instruments that would suit your needs and address your concerns regarding savings account. Regardless, there’s no denying that savings account is stage one in your quest for financial independence.