Savings Accounts Perks And Benefits
Investing and saving money depends on one core assumption – the ability to store your money in a safe place from where you can take actions to grow your wealth. People talk about bonds, stocks, gold, commodities, and real estate.
While the returns from such investments can be excellent, things can turn sour when the market crashes. These investments can become illiquid which means you cannot sell them at a satisfactory price when you need to.
The humble savings account is different. It may not offer the most spectacular returns, but it gives you safety and liquidity.
You can pull your money out of your savings account whenever you need to without losing any of it.
As long as the bank does not go under, you don’t lose your money either whether the economy crashes or a pandemic hits the world.
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Some portion of your money should, therefore, be parked into a savings account to manage your risk and to give you access to money for a rainy day (or a few rainy months).
There are many advantages to opening a savings account. Some of the savings accounts perks and benefits are:
#1: FDIC insurance
Savings accounts are FDIC insured up to $250,000. It means that the Federal Reserve guarantees you up to $250,000 in case a bank goes under.
As long as you do not put more than $250,000 in a savings account, your money is pretty much backed with water-tight insurance. Such a safety feature is not available with stocks, bonds, cryptocurrency, or any other investment.
#2: There are no write-downs
As long as you are under the $250,000 threshold, you cannot lose money in a savings account of a reputed institution. On the contrary, your money will grow at a very small percentage because of the interest that your money gets in a savings account.
Think about the global financial crisis of 2008 or the pandemic-led crash of 2020. The stock market lost a ton of money. People’s retirement plans saw some serious damage.
However, savings accounts remained unchanged. People who owned real estate saw rent defaults.
But, savings account holders did not lose a penny. So, while the returns in a savings account are low, the probability of losing money is virtually zero.
#3: You earn interest
While interest rates have dropped really low (and have even turned negative) over the last couple of years, savings accounts can earn you interest.
Many institutions offer a small interest on the money which you deposit in a savings account.
Why would they do that? Because they will lend out the money from savings accounts to other borrowers and charge a higher interest rate on such loans to make an income. But do not worry, your money is safe. Remember, it is FDIC insured.
#4: You can start small
Opening a savings account does not require a lot of money. The minimum balance limits vary from bank to bank, but one can open accounts with as little as $5.
Many banks have minimum balance requirements of $100 or more.
Compare that with certain investment accounts or index funds that require you to put up a few thousand dollars to get started. Savings accounts are definitely more accessible to all income groups than many sophisticated asset classes.
An asset is considered liquid when you can invest in it or sell out without affecting its price too significantly. In extreme cases, you cannot sell out at all because there is nobody to buy.
So, when you really need the money, you cannot sell your investment or you have to sell it at a huge discount and bear the loss.
Some assets like real estate take a really long time to sell. You have to meet brokers, wait for buyers, negotiate, and then agree to a deal.
A savings account offers complete liquidity. You can literally access your money with a few clicks. There is no loss and you get every single penny that your savings account has.
During the really tough times, having such liquidity is just priceless. As they say, cash is king. A savings account provides you with instant access to your cash.
Some Costs Associated with Savings Accounts
Savings accounts generally do not charge much in terms of fees. Some institutions, however, may try to make some money out of savings accounts by charging fees for not maintaining a minimum balance amount.
However, if the minimum balance is maintained (either on a daily basis or quarterly depending on the terms and conditions), then the fee is waived off.
Other types of fees can include withdrawal fees, ATM fees, or charges for requesting paper statements.
Normally, savings accounts allow a fixed number of withdrawals per month. Any withdrawal transactions beyond this limit attract a fee.
Similarly, basic savings accounts also tend to allow a fixed number of ATM transactions every month. If you use the ATM for more transactions than the stipulated limit, then ATM charges can show up on your monthly statement.
Then there are fees for other miscellaneous reasons. For example, if you need a physical copy of your account statement or if you need to wire money to someone, then a fee is charged.
A solution to these costs
Besides waiving off fees by meeting the financial institution’s conditions like maintaining a minimum balance, there are ways in which you can avoid the above-mentioned fees and earn a higher interest rate.
You can also consider opening an online-only savings account.
Many fintech companies and traditional banks now offer online-only savings accounts. You get access to your account via the institution’s website and everything functions like a regular account.
The only difference is that there is no physical branch. If you have any questions or problems, you pick up the phone and speak to customer service.
Since online accounts do not have a physical presence, the overhead costs for the financial institution are lower and hence they can offer a higher interest rate.
Plus, some of the fees mentioned above are lower (or not existent) with online savings accounts.
A savings account has plenty of benefits that help you store your money in a safe place for a long period of time. Opening a savings account also encourages developing the habit of saving and following good financial practices. A savings account should be a part of every financial plan.
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