You know you need to save money. At the same time, you may wonder, are savings accounts worth it? After all, the interest these accounts generate is likely less than what you’re paying on your debts, including student loans.
It’s true that sticking your money in a savings account may not offer the highest financial rewards, but it can definitely have a place in your overall plan. If you’re wondering, “Should I open a savings account?” here are some advantages and disadvantages to consider.
Savings accounts allow you to easily set money aside for a variety of purposes. There are plenty of benefits to a savings account, including the following:
- Easy to open: Go to the bank or credit union where you already have a checking account, and you can open a savings account fairly easily. You can also open an online savings account easily.
- Liquid: Savings accounts deal in cash, which means you don’t have to worry about selling investments or making other complicated moves to access your money.
- Accessible: Money in a savings account is very accessible. You can just use your ATM card or go to the bank to make a withdrawal. You can also transfer money quickly and easily online, or by using a mobile app. Keep in mind, though, that when transferring money from an online savings account with no ATM network to another account, it may take a few days to settle.
- Protected: One big benefit of a savings account is that your money is protected. If you put it in a bank with FDIC insurance or a credit union with NCUA insurance, your money is protected from failures (up to the legal limit) so you don’t have to worry about a big loss.
Don’t forget you can set up automatic transfers to easily move money from your checking account into your savings account. This is a good way to save without even thinking about it.
While there are real benefits to having a savings account, there are some downsides as well.
- Low interest: Getting a low return on your money is a key disadvantage of a savings account. And the cost of relying on a savings account for your long-term financial benefit can be higher than you think. “At least you aren’t losing money when it’s in the bank,” some might argue. Unfortunately, keeping your money in a savings account can indeed result in lost money, if the interest rate does not even keep up with inflation. That said, you may get better interest rates at credit unions than at traditional banks, and there are money market and high-yield online savings accounts that will often offer an even higher interest rate. For example, you might get less than 1% APY from your savings account at a traditional bank, while an online account might offer 2% APY. However, you must keep in mind that these are variable rates, and they can change quickly and frequently. So you might open an online savings account at a 2% APY but six months later that rate may be much lower for reasons including a cut in the federal funds rate. Still, overall, if you want to earn the most interest possible on your deposits, you should go with a money market or high-yield account over a traditional one.
- Fees: Some financial institutions have minimum balance requirements for savings accounts, and you may be charged a fee if your balance falls below this amount. Shop around for banks that do not have minimum balance requirements so you can avoid spending to maintain a savings account. Be sure you understand any and all fees that may be associated with any account before signing up, and how they might be avoided.
- Six withdrawal maximum: Federal Regulation D mandates certain types of telephone and electronic withdrawals, including transfers from savings accounts up to 6 per statement cycle. This includes withdrawals made online or by phone, rather than in person at a bank or at an ATM. If you exceed this limit, you may be charged a fee from the bank or credit union, or even ultimately have your account closed. So be sure to keep tabs on your withdrawals so you never exceed the limit. This is particularly key if you have an online-only account that doesn’t have an ATM network or any physical locations.
- Losing out on higher rewards: If you keep too much money in a savings account, you may be missing out on other, higher-risk but higher-reward ways to make money, including investing in the stock market. There are a number of tools available that can help you invest and see higher potential earnings. However, of course, with assets such as stocks, there is a much higher potential for serious loss if there is a downturn in the market. If you want to keep money on hand for emergencies, or if you know you’ll need the cash in the short term, it will be far less risky to keep it in a savings account. Other investments also have lower liquidity and a more complicated process of obtaining your money. You can’t simply withdraw from an ATM when you need to sell a stock, for example. You’ll also need to consider potentially paying a capital gains tax, or selling your stock for lower than what you bought it for.
From purely a yield standpoint, it might appear savings accounts aren’t worth it, especially if you are paying back debts that have higher interest rates, such as student loans.
However, the benefits of a savings account aren’t in how much you earn. Instead, you’ll want to consider the purpose of your account, and the liquidity and access you have.
When it comes to your emergency fund, a savings account is likely the best choice. After all, the whole point of an emergency fund is being able to quickly access the money when you need it. Some experts recommend having at least six months of living expenses in a savings account just in case, but even having a few thousand dollars in the account can help in a pinch.
You might also consider a certificate of deposit (CD), which you can get at banks and credit unions and which may provide a slightly higher yield than your savings account. Many CDs, however, feature early withdrawal penalties, which makes them less liquid than the typical bank account. There are some no-penalty CDS available at some banks, however, so this may be an option worth exploring.
While you might not want to put all your savings in a low-yield cash account, savings accounts can have their place in your broad financial plan, which may also include investment and retirement accounts.
You can go to the Student Loan Hero bank account marketplace to look for our list of banks with lower fees. Additionally, Student Loan Hero’s parent company, LendingTree, offers their guide to savings accounts.
Rebecca Stropoli contributed to this report.
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1 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of Feburary 1, 2021.
2 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.49% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.34% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of October 26, 2020, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 10/26/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.
© 2020 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
3 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810.
As of 02/17/2021 student loan refinancing rates range from 1.91% APR – 5.25% Variable APR with AutoPay and 2.95% APR – 7.63% Fixed APR with AutoPay.
4 Important Disclosures for SoFi.
5 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of January 4, 2021. Information and rates are subject to change without notice.