You know you should be saving money. A savings habit is one of the most valuable money traits you can develop.
But is your money working effectively on your behalf? Just sticking your money in a savings account might not be the best option for long-term saving.
Before you stash your cash in a standard bank account, here are some advantages and disadvantages of a savings account.
Benefits of a savings account
Savings accounts are great because they allow you to quickly and easily set money aside for a variety of purposes. There are plenty of benefits of a savings account, including the following:
- Easy to open: Go to the bank where you already have a checking account, and you can open a savings account fairly easily. You can also open an online savings account as long as you have the documentation to make it happen.
- Liquid: Savings accounts deal in cash, and that means you don’t have to worry about selling investments or making other moves to access your money. The liquidity of cash means you can use it just about any time and for just about anything.
- Accessible: Money in a savings account is very accessible. Just use your ATM card or go to the bank to make a withdrawal. You can transfer money quickly and easily online or using a mobile app.
- Protected: One of the biggest benefits 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 so you don’t have to worry about loss.
Don’t forget that 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.
However, there is a cost to all these benefits of a savings account. Because your money is safe, accessible, and liquid, you won’t see a very high return.
Savings accounts and low interest
Low interest is the biggest downside to using a savings account. I remember the heady days of 2004 and 2005 when I opened an online savings account and received 5% APY on my balance.
Today, you’re lucky if you can find a savings account offering 1% APY.
When the Federal Reserve started cutting its benchmark Fed Funds Rate, savings account rates began suffering. Now, we are in a low-rate environment.
That means low mortgage rates and lower rates on other types of debt, which is a positive for people who need to borrow money. For savers, though, it’s a bummer.
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 does result in lost money.
In the first half of 2016, the year-over-year rate of inflation was 1.1 percent, according to the Bureau of Labor Statistics. That number, however, is relatively low. It’s not uncommon, historically, to see plenty of years when inflation is between two and three percent.
Those types of trends make cash less valuable, in real terms, over time. Earning 1% APY isn’t enough to offset the effect of inflation on the future value of your money.
What else can you do with your money?
Instead of keeping your money in a savings account, you can keep it in places where it’s more likely to appreciate. There are a number of tools available that can help you invest and see higher potential earnings.
You have a better chance of seeing bigger gains if you put some of your money in bonds, stocks, and other assets with potential for growth. However, there are downsides to keeping your money someplace other than a savings account:
- Potential for loss: With any investment, you have the potential for loss. While you have a bigger chance for gains, that is tempered by the possible risk of losing money, whether you are investing in bonds, real estate, stocks, or gold.
- Lack of liquidity: If you decide you want capital from your investments, you need to sell them. It can take one to three business days (or longer) for some sales to settle. Plus, if you invested in something really illiquid, like real estate, it can take months to get your capital.
- Lower accessibility: It’s not as easy as swiping an ATM card or asking for a transfer when you want access to money that’s tied up in investments.
There are advantages and disadvantages of a savings account, and the same is true of other places to keep your money. The important thing is to consider your options and figure out what works best for you.
So, are savings accounts worth it?
From purely a yield standpoint, it might appear that savings accounts aren’t worth it. However, the benefits of a savings account aren’t in how much you earn. Instead, it’s about the purpose of your account and the liquidity and access you have.
When it comes to your emergency fund, a savings account can be a good choice. The whole point of an emergency fund is to be accessible and liquid so you can get the money quickly when you need it.
However, for some people, it’s a waste to see a large amount of money sitting in a low-yield savings account.
I’m one of those people. I keep three to four weeks’ worth of expenses in my “high-yield” savings account, earning 1% APY. The rest of my emergency money is actually in a taxable investment account. Having a chunk of money in savings allows me access if I need it and plenty of time to start liquidating other assets if I need more later.
While you might not want to put all your savings in a low-yield cash account, savings accounts do have their place in your financial plan. Look at it holistically and integrate a savings account where it makes sense for your goals and peace of mind.
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