Ten Advantages of Having a Savings Account
Most adults have trouble saving for the future, according to a recent survey by financial services company Bankrate. Their study found that 20% of Americans don’t save any of their annual income at all. For those working abroad, saving for the future often takes second or third priority, as living expenses and sending money back home are more important.
However, by not saving for the future, many young adults are setting themselves up for financial problems in the long run. One simple way to start setting aside money is to open a savings account. Savings account, unlike checking accounts, do earn a certain interest (called APY, annual percentage yield). As a result, a savings account can be a good vehicle for growing your money slowly over the years. Here are the top ten reasons for opening a savings account.
Earn interest on your money
Perhaps the biggest advantage of having a savings account is that the money you save grows. When you open a savings account, the balance you keep earns an APY, annual percentage yield. Most checking accounts don’t pay interest, but savings accounts can earn upwards of 2% APY. That’s better than nothing!
Set aside money for emergencies
A savings account is a great way to set aside an emergency fund in the event that unexpected expenses happen. Financial experts recommend having three to six months of living expenses saved in the event of an emergency. Car repairs, hospital bills, or home renovations are all big costs that may come up suddenly. Invest a small amount of each paycheck in your savings account to take advantage of the APY and have money to fall back on when you need it.
Protect your money
The financial crisis in 2008 has many consumers looking into alternative investment opportunities like cryptocurrency. However, the solution to protecting your money may be much simpler than Bitcoin. Savings accounts protect your money in the event of a financial crisis. “The Federal Deposit Insurance Corp. insures the money in a savings account up to $250,000, which means your money is protected even if your bank goes under. Other investment and savings options, such as mutual funds and bonds, typically aren’t FDIC insured, whether or not you purchase them through a bank.” If you’re worried about the economy, a savings account is a much better option to burying your cash in the backyard.
Create good money habits
A savings account is a good incentive to start practicing good money habits. In addition to setting aside a little each month for emergencies, it can also be a vehicle for creating better overall financial stability. When money is readily available, be it in your checking account or as cash, it tends to burn a hole in your pocket; spending becomes harder when your funds are invested in a separate account that you’ve designated as “savings.” The psychology of having a savings account helps create overall financial stability that is a little more difficult when you have ready access to cash.
Keep your cash accessible
While a savings account is a good place to deposit cash you don’t need immediately, it’s equally good if you need to access funds quickly. “If you need to spend money, it’s quick and easy to transfer funds to a checking account (transfers are virtually instant within the same bank). Other types of accounts, like certificates of deposit (CDs), may restrict your ability to move money quickly.” Some savings accounts have a limit on certain types of transfers, but going to a teller or ATM for cash is relatively unrestricted.
Give yourself overdraft protection
Many overseas workers and expats send the majority of their money back to their home country bank account, leaving the bare minimum in their overseas checking account for living expenses only. A savings account can be a good backup for overdraft protection. If a check or debit from your checking account leads to a negative balance, linking your savings account to cover the difference can mean saving money on expensive fees and penalties. Use a savings account to help manage money between different accounts without the risk of going into the red.
Save for specific goals
Opening a savings account is free. That means it’s feasible to open multiple savings accounts to help organize your finances. Some people use various savings accounts to budget better toward long-term goals, dedicating accounts in specific categories. For example, you might have one account for emergencies, one for education expenses, one for a down payment on a house, and one for a wedding or other event. Savings accounts can become a good way to keep your budget in check while growing your funds toward a financial goal.
Savings accounts are free
It bears repeating: savings accounts are free to open. However, there are some secondary or hidden costs of which you may not be aware. Some banks may charge monthly fees for keeping your account open, such as maintenance fees. Be aware of excess transaction fees if you’re making more than six transfers a month in and out of your savings account. The biggest cost, potentially, is hidden “opportunity costs” – the cost of putting your money in savings account instead of doing something else with it, like repaying a loan or investing in the stock market. Opportunity costs aren’t necessarily bad, but they are important to think through when setting up your account.
Circumvent needing a credit score
When you move overseas, you lose your credit history. Establishing the credit you need for a loan takes time. A savings account, however, can help you avoid the need to establish a high credit score. “When you purchase something on credit, you are paying for the freedom of being able to get the item right away, although you don’t actually have the money on hand to purchase it. If you amass a decent amount of money in a savings account, it permits you to purchase some things that you desire without having to rely on a loan or use credit and possibly lower your credit score by doing so.” If you’re planning to live overseas for the foreseeable future, invest early in a savings account to make sure you’re prepared for big expenses down the road.
Savings accounts have minimal maintenance Another big advantage to having a savings account? These bank accounts have few maintenance requirements. With the exception of maintenance fees, which you can avoid with a bit of research, you don’t have to do much to keep your savings going. “Most savings accounts have the option of setting up automatic transfers from a checking account. This automated savings means you don’t have to remember to transfer money to build up your financial cushion.” Deposit your money and watch it grow in protected account while keeping your other accounts in the black.