When To Use A Savings Account

Written by: Seth Rogers

Your parents probably always told you, “Make sure you have a savings account!”  Maybe you were even lucky enough that they opened one up for you when you were very little to help save up for things like college. If not, you might be asking yourself, “What is the point of a savings account?  Why is it any different from a checking account?”

A savings account is more than just a different place for you to store your money so that you’re less tempted to spend it (although that can be very beneficial).  The trick is to know what to use your savings account for and how to find the best one for your needs.

What Is A Savings Account?

A savings account is a place where you can securely store money that you can quickly get if you need it, earning you a small rate of return with very little risk. Savings accounts are federally insured, meaning up to $250,000 of the money in your account is covered if the bank fails.  The money you put in a savings account has an annual percentage yield (APY) which means it will grow slowly over time due to compounded interest.  Interest rates vary from bank to bank, but the national average is 0.09%.

The money you keep in a savings account is a little less accessible than the money you keep in a checking account.  With a checking account, you can easily access the funds whenever you want as often as you’d like.  With a savings account, federal law limits you to six transfers or withdrawals a month.  Any additional transfers incur a fee.

The transfer limits for savings accounts may actually be a positive as they keep you from being tempted to withdraw regularly, making it easier to reserve the funds for emergencies only.  Savings accounts are typically used to create distance between the everyday spending money you keep in your checking account and the money you reserve for later use.

How Much Should I Keep In My Savings Account?

The best use of a savings account is to hold a small amount of money that you may need in the short term in case of emergency.  For most people, this amount is anywhere from three to six month’s living expenses.  It can take time to build up to that, however, so try and start out with around $500 and go from there.  A minimum of $500 is enough to help you with minor financial problems, but the goal is to have a fund in your savings account to help keep you afloat should anything more drastic happen.

Once you’ve reached this threshold, the savings account has served its purpose.  Even with high interest returns in some online banks, your money could be put to better use elsewhere.  If you’ve got a savings account with a small amount of money that you can use in the short term, then you’re safe to start investing more of your money in other areas such as retirement or stocks.  Investing in a 401(k) will result in much higher yields for your cash than if you were to leave it all in a savings account and accrue interest there.

Where Should I Get A Savings Account?

If you want the maximum benefit of a savings account, you’ll want to look around a little bit. Most people make the mistake of opening a savings account with the same bank as their checking account. While this can be beneficial in terms of convenience and familiarity, you may be missing out on substantially higher interest rates that you could be taking advantage of.

Most physical banks have relatively low interest rates that are either at or below the average of 0.09%.  This means that if you put $5,000 in a savings account with your local bank that has 0.09% APY, after five years you’ll only have $5,022.55.  Many online banks offer a much higher APY at around 2%, which with the same $5,000 would leave you with $5,520.40 after five years.  Although savings accounts are not intended to be the place where you invest most of your money, you still want to make the best use of your money and choose a savings account with a high APY.

Benefits Of Online Savings Accounts

Your best bet to find a savings account with a high yield is to choose an online savings account. Without the cost of maintaining a physical branch, online banks are able to offer much more competitive interest rates than brick-and-mortar banks.  Benefits include:

Interest rates.  Online banks offer APY’s for savings accounts that are much higher than the national average.  MySavingsDirect offers one of the highest APY’s of 2.4% a year.

No fees/minimums.  There are plenty of online banks that charge no monthly maintenance fees to have a savings account.  You can also find several that don’t require a minimum balance to open the account.

24/7 access.  Unlike with a physical bank, you can access your savings account online at any time.  While many physical banks have online capabilities, online banks have specialized technology in their online tools.

Drawbacks of Online Savings Accounts

Harder to use.  You may find accessing and depositing your money in your savings account takes a bit longer with the use of an online bank.  If you’re looking for instant cash when you need it, you may have to work a bit harder to ensure you find a bank that offers speedy access.

No physical service.  If you like the aspect of walking into a bank and talking directly to a bank teller or manager, online banking may not be for you.

Lack of consolidation.  One of the biggest benefits of having your checking and savings account be at the same bank is the ease of transferring funds from one to the other. Having a savings account with a different online bank may make it harder for you to keep track of your funds.


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