Opening a savings account has become a sort of rite of passage for many young people. After all, by having their own savings account, they’ll have the ability to pay their bills in a quick and easy way and avoid expensive late fees. They can also build an emergency fund for rainy days, save for near-term goals (such as going on a vacation or raising enough money to pay for a house deposit) and even create a nest egg for their requirement.
But, if you’re planning to get your own savings account, don’t just go into the first bank or credit union you see. Instead, take the time to learn about the pros and cons of this personal finance tool. This way, you’ll know if it can give you great value for your money and if it’s worth your time and effort, and you can ultimately make an informed and financially feasible decision.
Not sure where to begin? Start by taking a look at the following lists:
List of Advantages of Savings Accounts
1. Give you easy access to your money.
Unlike other financial products, savings account keep your money liquid and allow you to withdraw it whenever you want. So, if you run into an unexpected bill, you can use the cash you’ve set aside to pay it promptly and avoid sky-high late fees. Similarly, if you fall unexpectedly ill and need to be hospitalized, or if your car breaks down and needs costly repairs, you can use your savings to tackle these emergencies and bring your life back to normal ASAP.
2. Keep your money safe.
When they have extra cash, many people opt to carry it around in their wallet, place it in a piggy bank or stash it under their mattress. Unfortunately, all of these strategies put their money at risk. Those who carry their cash around can lose it if their wallet gets stolen. Those who keep their money at home (either in a piggy bank or under their bed) can find themselves without any savings if their house gets burglarized or becomes damaged in a fire.
So, if you want to protect your hard-earned cash, don’t use the strategies mentioned above. Instead, deposit it in your bank or credit union. This way, you’re sure that your money is insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Share Insurance Fund (NCUSIF).
3. Don’t require a huge initial investment.
Got only $10 to spare? No problem! One of the best things about savings account is that they need only a minimal initial investment, with some banks requiring you to have $25 to open your account and others asking you to deposit as little as $1. This is great if you’ve just started working and want to develop good financial habits but don’t really have hundreds of dollars to invest in stocks or bonds.
4. Lets you link with your checking account.
Many savings accounts nowadays can be connected with checking accounts, which is great since this feature is incredibly helpful to a lot of people (including you!). In fact, according to a survey done by Novantas in 2014, 61 percent of the respondents said that they use their savings account to transfer money to their checking account when their balance is running low. This way, they can cover shortfalls and avoid incurring overdraft charges and other fees.
5. Allows you to automate bill payments.
Sure, you can set up your debit card or credit card to automatically pay your bills every month. But what if you don’t yet have either of these cards or if you want to avoid using credit? Well, you can automate bill payments through your savings account! This way, you won’t have to worry about missing due dates and incurring late fees, and you have the assurance that you’re paying your bills with money you already have (instead of money you’re borrowing from your debit or credit card provider).
List of Disadvantages of Savings Accounts
1. Usually have low interest rates.
If your goal is to make your money grow, opening a savings account isn’t the right choice for you. The security and easy access that you’ll enjoy with your savings account comes with a trade-off: you’ll invariably have relatively low interest rates (usually less than 1 percent per annum). This means you’ll see only minimal growth and enjoy limited yields.
With these in mind, you might want to consider investing in stocks, government bonds, mutual funds and other high-yield investment vehicles. They don’t provide the same level of safety and security that savings accounts do, but they give you the chance to enjoy high interest rates and earn more money.
2. Are insured only up to a certain amount.
As mentioned above, the FDIC and the NCUSIF provide insurance to bank and credit union savings accounts. But what you have to know is this: these two organizations limit their coverage to $250,000. So, if your savings is more than this amount, you won’t enjoy full coverage. You’re better off distributing your money among several savings accounts or switching to high-ROI investments
3. Can tempt you to spend your money.
Since you can withdraw from your account at any given time, no one can really stop you from dipping into your savings whenever you want. This can be detrimental especially if you’re spending your money not on necessities or emergencies but on non-essentials like designer clothes or a new smartphone. If you want to avoid the temptation of unnecessary spending, you can put your money in stocks, certificates of deposit and other long-term investments that come with a maturity date.
4. Charge high fees if you fall below the minimum amount.
Banks and credit unions, as mentioned above, don’t require large initial deposits. However, many of them have a minimum balance requirement. If your savings fall below this minimum amount, your bank or credit union will charge you with a certain fee. This can be a problem if you frequently dip into your savings or if you need to withdraw most of your money because of an emergency.