The Top Five Advantages of Maintaining Your Savings Account

The Top Five Advantages of Maintaining Your Savings Account

It is easy to underestimate the significance of having a savings account. Your bank account is the most important financial tool you have. There is a good chance that your checking account is connected to your accounts for automatic bill payment, direct deposits, and bank cards. It’s possible that you believe that the best use of money is to put it into investments so they can increase in value over time.

In spite of this, there are a great many justifications for maintaining a cash balance in a savings account. These factors are only going to become more important as the competition from internet-based businesses continues to push interest rates higher and urges banks to provide new services that are more convenient.

Here are some of the most compelling arguments in favor of establishing a savings account, in case you haven’t done so already.

Key Takeaways

  • The money in your savings account won’t be able to get into your checking account, which will make it easier for you to refrain from spending.
  • Your savings account is a convenient place to have money set aside for unexpected expenses.
  • The Federal Deposit Insurance Corporation protects savings accounts up to $250,000 per depositor. This means that your money will always be safe in a savings account.
  • A savings account provides you with easier access to your money than the alternative types of savings.
  • You won’t get richer by putting money in a savings account, and inflation may actually make your money worth less over time.

Reduce your propensity to go out and spend

Having a savings account requires you to keep a certain amount of money separate from the money you use for your day-to-day expenses. Simply doing that can help you avoid giving in to the desire to spend money that you would rather put away. Putting up roadblocks to prevent impulsive spending is one way to stick to your monthly spending plan and stay out of debt.

If purchasing a new video game is as simple as swiping your credit card, then it’s possible that you won’t even think about how much it costs until the next time you look at your bank statement. On the other hand, if you have to make the effort to transfer expenses from your savings account into your checking account before you make a purchase, you are more likely to be conscious of the cost as well as the effect that it will have on your total finances.

Be prepared for unexpected events.

The money you have set aside for unexpected expenses should really be kept in a savings account. Everyone ought to make it a goal to put aside a sizeable sum of money in case of unexpected circumstances. You will never be able to forecast when your water heater, the roof, or your garage door will need to be replaced; when your garage door will stop operating; your vehicle may require substantial repairs, or your employer may go out of business. If something like that were to take place, having an emergency fund in your savings account would make getting back on your feet much simpler. You’ll be able to keep your cool despite the potentially stressful nature of the situation.

If you do not have access to funds for unexpected expenses, you may be compelled to take on further debt, sell your possessions, or make other personal sacrifices that put your health or safety in jeopardy in order to make ends meet.

Maintain the Security of Your Funds.

When you have more money than you need to spend right away, putting some of it away in a safe place is an absolute necessity. The risks associated with investments are well known, but keeping cash on hand also has its own unique set of challenges.

If you keep your money in physical form, there is always the risk that it may be lost in a disaster such as a fire or a flood, that it will be stolen, or that you will forget where you hid any more funds over time.

The safest place for extra cash is in a financial institution like a bank or credit union. Banks provide physical safety for your money, and FDIC-insured banks (NCUSIF-insured credit unions) also handle the risk of bank failures such as identity theft, fraud, and bank errors. Credit unions do not have FDIC insurance. The government of the United States will protect up to a maximum of $250,000 per customer and per institution. You are protected from certain forms of bank account fraud and errors by federal rules, but you are required to monitor your accounts and take prompt action in the event that something occurs. 

Saving for Goals

The act of opening and maintaining a savings account compels you to keep your financial affairs in order and simplifies the process of making long-term plans. If you keep all of your money in a checking account, however, it might be difficult to precisely track how much you have saved over time. This is true even if you have already started making plans for the future. Look for online savings accounts that will let you set up many subaccounts. This will help you stay organized and will keep the fees to a minimum.

It is possible that it makes sense to establish a single savings account dedicated to each of your long-term monetary goals. You might, for instance, have one account set up for savings in case of an unexpected expense, another account for a fund to use when going on vacation, and a third account for a down payment on a house. You would put any extra money into these accounts so that you could keep better track of your goals and eventually reach them.

Your money is available to you.

When it comes to possibilities for storing your cash, savings accounts are among the most liquid choices. It is simple to move money from a savings account into a checking account if there is a requirement for spending money (transfers within the same bank are virtually instantaneous). You will be able to withdraw cash from your account just as quickly using an ATM. On the other hand, some types of accounts, such as certificates of deposit (CDs) or investments held in a brokerage account, may limit your ability to easily move money in and out of such accounts.

The majority of financial institutions do not make it possible to withdraw money from savings accounts using easy methods such as checks or debit cards. Checking accounts are typically the only option for expedited withdrawals.

Even though savings accounts allow access to your money at any time, you should be aware that there are withdrawal limits. It’s possible that savings accounts have a cap on the number of withdrawals or transfers you’re allowed to make in a given month. This was formerly a law that was enforced by the Federal Reserve’s Regulation D. However, this cap varies from bank to bank. Because the Federal Reserve lowered the required amount of reserves held by depository institutions to zero, the cap was lifted in April of 2020. However, financial institutions are still able to impose restrictions based on their own internal regulations. Therefore, you should check to see if your bank has transaction limits on savings accounts.

Most of the time, accounts are free.

Why wouldn’t you have a savings account when there are so many that are offered to you completely free of charge? For instance, online banks will let you open an account with no required minimum balance, and they won’t charge you any fees on a regular basis either.

Maintaining a savings account practically never results in a loss of anything of significance. Free savings accounts can frequently be found in credit unions as well as smaller, community-based banks. You can even find a bargain that rewards you with money just for signing up for the service and creating an account (these kinds of deals usually require you to maintain a minimum account balance for a set amount of time).

The Drawbacks of Having a Savings Account

There are very few disadvantages associated with savings accounts, yet it is vital to be aware of them. The comparatively modest interest rates that you get on savings accounts are the biggest drawback of having money in these accounts. This is by design; they are intended to be a replacement for hiding money in a coffee can in the backyard or putting cash under the mattress.

Because some savings accounts have requirements for maintaining a certain minimum value, it’s possible that you won’t be able to access all of your funds even if you want to keep the account open.

In most cases, the interest earnings don’t even come close to keeping up with the rate of inflation. Because of this, your purchasing power will decrease over time because the value of your money will not increase at a rate that is proportionate to the rate at which prices are increasing. For instance, one hundred dollars deposited into savings at the moment can be used to purchase a particular quantity of items. Because costs tend to increase on an annual basis, even if you did not add any interest to that $100 and kept it in the bank for a year, it would not be sufficient to purchase the same quantity of items.

Customers are able to obtain loans through their savings accounts. When you get a loan from your bank, the institution is giving you money that was previously saved in other accounts. Money that you have saved up is also being loaned out to other borrowers. You get paid interest due to the fact that this banking method contributes to the continued expansion of the economy. For this reason, you won’t be able to withdraw all of your money at once from most banks. To allow a consumer to cancel an account, the financial institution frequently needs to take out a loan from another financial institution because the available money may be committed to paying off loans made to other customers.

Because of these factors, it’s possible to have an excessive amount of money in your savings account. But how much should you put away in your savings?

How Much Is Considered Excessive?

It is in your best interest to maintain whatever it is that you might require for particular circumstances in a savings account. To determine how much money you ought to have stashed away in savings, first add up all the costs that you think you could have to pay in the future.

After ensuring that you are able to cover your day-to-day costs, there are a number of other costs for which you should consider putting money aside:

  • Urgent requirements for travel
  • Medical bills
  • Repair work on automobiles
  • Fixing up the house
  • Appliance replacements
  • Vacations
  • Job loss
  • Other potential expenses that may arise over the next six months

You should also take into consideration the amount of money in savings that you may have available to sit back and relax with. For instance, based on the estimates for your emergency fund and three to nine months’ worth of costs, you might only need $20,000 in savings. This, however, is very dependent on both your financial situation and your living situation. 4, On the other hand, you might feel uneasy with having only $20,000 in savings and would prefer $30,000 instead, just in case. There is absolutely nothing wrong with doing this since it also provides you with the benefit of having peace of mind.

Just be sure to keep in mind 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 has a history of always coming back stronger as long as the economy is producing. If you have more money working for you, the less work you have to do to earn money.

Frequently Asked Questions

Do you think it’s a good idea to store your money in a savings account?

The money that you won’t need within the next few months can be safely stored in savings accounts, where it will still be easy to reach in case of an emergency. You are passing up the opportunity to use the money in your savings account to make more money by adding to your savings if you have enough saved up to cover three to nine months or more of bills and emergencies.

Which is better: having money in savings or having cash on hand?

You should have enough cash to pay the expenses for a few days and enough savings to cover the expenses for three to nine months or more, including any potential emergency costs. Anything above that will just be sitting in your savings account, where it will be subject to inflation and lose its purchasing power. When looking for a place to deposit your money that offers higher returns, it is helpful to look for investments or accounts that you are comfortable using.

Is a savings of $50,000 too much to have?

If you stick to the general rule of having three to nine months’ worth of spending plus emergency funds in your savings and determine that $50,000 is the appropriate amount for you, then that amount is not excessively high for you. On the other hand, if you only require $25,000, it may be too much; the appropriate sum also depends on your degree of comfort or how much you prefer to have in savings in order to feel comfortable.

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