More than likely, you already have money in savings (Savings Account, Money Market, CD, Savings Bond) at the bank or credit union. You may have this account linked directly to your checking account in order to make transferring money to savings easy. Likely, some of you reading this have a monthly transfer occurring so savings take place without any conscious effort.
A bank savings account is a type of account designed for holding money in which you do not need immediate access. A savings account is the most convenient place to save money, but it might not be the most efficient place for your money to work on your behalf. It is the most basic account offered by banks today. It is an account that offers interest on the account, but the owner has limited fund availability. The only way you can access the funds are through withdrawals at the bank or ATM. Many banks allow only one to two transfers a month from the account, but these are often limited.
The interest rate on a normal savings account is fairly low. For this reason, savings accounts are good for people who are just beginning to save money and cannot meet the minimum balance requirements for a money market account. Savings accounts are insured by the FDIC for up to $250,000.
A savings account is a good place for your “emergency fund.” More specifically, an emergency fund should contain anywhere from three to six months of bills. Since $1,000 is the amount that most emergencies will cost if you own your own home, you should increase that amount up to $3,000 as soon as possible. After that you may consider putting the remainder of your emergency fund into other savings tools offered through your bank.
The following is a quick review of what savings accounts are and reasons for having a bank savings account.
What is Right for You?
There is no “right answer” when it comes to savings, ultimately this will depend on your needs. If you use your savings for overdraft protection and want instant availability in the event you need it, a savings account might be the most appropriate. If you plan to make a large purchase or have a predictable expense in the next few months or years down the road, you will likely find better rates with a CD (Certificate of Deposit) or money market fund.
For most, this decision comes down to having a mixture of different savings vehicles. There could be an “emergency fund” in a savings account at the bank, possibly some cash in a money market fund, and some CD’s or savings bonds stashed away for longer-term savings. Wherever you are in life, you want your money working as hard for you as you did to earn it.
Savings accounts offer easy access to your money. In this type of account your money is “liquid,“ or available for speedy withdrawal. Keep in mind; savings accounts are not as liquid as checking accounts, this is because you can get money from a checking account by simply writing a check.
Grow Your Money
This is the most basic reason for having a savings account. Your bank savings account pays a rate of return on all the money in the account, called interest. In other words, you get paid for keeping money in the account. Bank savings accounts pay you more than checking accounts.
Savings accounts offer a safe place to keep your money, plus they are insured by the FDIC for up to $250,000. Suppose that you have a few thousand dollars that you are not going to use for another 3 months. You actually have several options for what to do with this money; carry it with you, put it under your mattress, or better yet put it into a bank savings account.
The obvious option to choose is to put it in a savings account. If you carry the money with you, it could be misplaced. If the money is under your mattress, your house could burn or it could be stolen. However, if the money is in a bank savings account, your bank is responsible for its safekeeping. If the bank burns down or gets robbed, your money is protected, and any reputable bank will not just lose your savings. Furthermore, you only earn interest on the money in the savings account, not on what you hold or what is under the mattress.