Saving accounts – Pros, cons, and tips to create one

Saving accounts – Pros, cons, and tips to create one

A savings account is an interest-bearing deposit account opened and operated at a bank or any other financial institution. While the importance of having a savings account is easily overlooked, it’s one of the easiest routes to experience financial freedom. Irrespective of whether you have defined financial goals or not, savings accounts provide security, financial backup during an emergency, and above all, peace of mind. Though they pay a modest interest rate and are not as beneficial as other investments, their importance is second to none.

Why do you need an emergency savings fund?
No matter what you do in life for your earning, not having an emergency savings fund can spell big trouble. While you have recurring monthly expenses, you may come across huge unforeseen expenses out of the blue that demands immediate payment. Forgoing other investments, surrendering your insurance policy, and breaking FDs are not the wisest things to do. In such cases, having a savings account eliminates the risk of experiencing a financial setback and provides a financial shield to your short and long-term financial goals.

Though there are some restrictions on the withdrawal limit, the exceptional flexibility they offer in keeping and using cash for buying an automobile, going on a vacation, and other short-term needs makes having a savings account a safe and reliable option.

Undeniable reasons to open a savings account
Whether you’re actively working or not, or even if you’re a homemaker or a student, opening a savings account is a prerequisite to start becoming financially independent and experience financial freedom. The top reasons to instantly create a savings account are:

  • To start accumulating wealth
    While savings accounts don’t provide the kind of interest other investment vehicles offer, they’re the first step in the direction to save money and start building wealth. Remember, financial freedom begins with a single dollar, and every dollar saved adds to the overall goal of achieving financial independence. While you need sufficient money to invest in stocks and real estate, starting with a savings account is the key. As you keep saving money in your savings account, it keeps earning interest that eventually increases over time.
  • To be independent of credit
    Very often, individuals rely on credit cards and personal loans to fulfill unexpected emergencies. However, depending on credit options like these attract very high-interest rates that only depletes your hard-earned money. When you have a savings account, you can accumulate money and meet your financial goals without falling for credit.
  • To curb the temptation to spend
    When you have a savings account, you’re committed to saving a significant portion of your earnings regularly. This habit eliminates the temptation to spend money on things you don’t necessarily need. Even when you go to buy something, you’ll be forced to think twice before making the purchase. It’s a great way to stop excessive spending and stick to a monthly budget to avoid debt. Taking time to analyze your expenses will make you more aware of the costs involved and their effects on your financial goals.
  • To be flexible for emergencies
    While you have other lucrative investments, you cannot access money from them easily. There are bound to be unexpected expenses or surprises at several stages of your life, such as accidents, home and car repairs, medical emergencies, and other situations where you need cash immediately. Keeping a substantial emergency fund in the form of a savings account will help you avoid debt and meet urgent requirements instantly.
  • To easily access cash
    Maintaining a savings account is the best liquid choice for accessing your money anytime. You can quickly transfer it to your checking account or draw a significant amount from the ATM. However, it’s essential to know the limits on specific types of withdrawals. While you’re free to withdraw cash from the ATM as often as needed, transfers to other accounts have some restrictions.
  • Perfect for automated bill payments
    Your savings account is the ideal tool to set automatic payments for your recurring expenses like mobile bills, electricity, water, EMIs, and many others. This benefit is often free from withdrawal and transfer laws. It’s also an excellent way to avoid missed payments and late fees.
  • To create capital for investment
    If you have plans to start investing in lucrative financial instruments like stocks, shares, and real estate, you need large sums of money. To build up this capital for investing, it’s crucial to put money aside regularly into your savings account and build a significant amount over time. This will give your investment dreams the wings to take off for bigger investment opportunities.
  • To save money for buying the things you intend to buy
    You’ve always dreamt of buying your favorite car or going on a vacation to the desired destination. However, without accumulating money, your dreams aren’t going to be fulfilled. Savings accounts help you take the necessary steps to deposit money regularly that eventually accumulate into a significant amount to help meet your goals and realize your dreams.
  • Asset protection
    The returns associated with a savings account is way lower than other investments like bonds, shares, stocks, and real estate. However, it’s not wise to put all your money into speculative investments. If you do so, you’ll be forced to sell them for a lower price and at an unfortunate time to meet unexpected expenses or emergencies. A savings account insulates your investment portfolio from loss via forceful selling.
  • A sense of security and peace of mind
    The funds you deposit in your savings account are secured by FDIC insurance. This provides a shield for your funds in case the bank suffers losses and closes down. The government will replace your funds either in full or up to a significant percentage. Your cash cannot be stolen, lost, or destroyed, giving your funds a sense of security.

Disadvantages of a savings account
As you know, having a savings account extends myriad advantages and motivates you to realize your financial dreams. You’ll be able to track your finances better and make sound decisions to ensure there’s enough protection for a rainy day. However, these accounts also come with their own set of disadvantages. The common drawbacks of opening a savings account are:

  • There’s a minimum balance requirement
    Nearly all savings accounts come with a minimum balance requirement or even maintenance fees. If your account falls below the minimum balance required, your bank will charge maintenance fees and deduct the same from your account, affecting your interest earned in the process.
  • Low-interest rates
    Irrespective of the type of savings account you open, the interest you earn is way lower than other financial instruments like certificate of deposits, money market accounts, FDs, and others.
  • Withdrawal limits
    Most savings accounts have federal limits regarding the number of withdrawals allowed per month. If you exceed the federal limits, your bank will charge a fee or change your account from savings to a checking account.
  • Up for inflation
    Without a competitive interest rate, inflation can consume a significant amount of interest earned. This leaves you with an account balance that’s worth significantly less than a year from the current financial year.
  • Easy access
    While this is an advantage, it’s also a drawback since the temptation to withdraw money makes long-term savings a challenge. It’s very easy to withdraw cash as and when you like, and with a debit card, swiping for things you don’t need can become habitual.

How to create your rainy day fund?
Savings accounts play the essential role of an emergency savings fund to give you financial protection during emergencies and unforeseen situations. Creating an emergency fund can seem a daunting task initially, but taking a determined approach is the key. Here’s a process to make an emergency fund and start saving:

  • Create a budget
    Analyze your bank statements and categorize each expense. Study each expense thoroughly to know where exactly your money is going. Always create a realistic budget since an unrealistic one can demoralize you.
  • Cut back on spending
    Once you analyze your spending habits for the past few months, you’ll begin to see a specific spending pattern. You can see where you’re spending too much, and it’s time to take measures to cut back. Are you overspending on shopping, or are you eating out too much? See if you’re overspending on buying the latest gadgets or even something immediately unnoticeable like spending excessively on transportation. The key to starting saving is to cut back or entirely avoid spending wherever possible. You’ll often come across areas where you can take immediate action to reduce spending.
  • Contribute monthly
    There’s no fixed formula to save a certain percentage of your earnings in your savings account. This is because of the different lifestyles and needs each individual has. However, the general rule of thumb is to save at least 20 percent of your monthly earnings. Realize that saving money isn’t a chore but a cushioning for future financial commitments.

This rainy-day fund is your doorway to experience financial freedom, and without it, you’ll be trapped in debt. It can lead to personal bankruptcy and can derail your financial goals quickly.

Opening a savings account
If you intend to open a savings account, you can visit the bank or the credit union you want to open with. You can also visit their branches or open one online. You’re required to provide your personal details and professional information along with the required number of photographs.

Every savings account earns taxable interest, and for this purpose, you’ll need to provide your Social Security Number. Coming to the minimum deposit, some financial institutions or banks request you to make an initial deposit while opening the account. There are other savings accounts where you can fund the money later, either in person or online.

The amount of money you keep in your savings account depends on your financial goals and how you use the account. For instance, if you use funds regularly from your account, the balance can vary significantly compared to using the account to build wealth. If you intend to use it as an emergency fund, it’s advisable to keep enough savings to cover a minimum of three to six months of living expenses. This is vital to provide you with cushioning in case you lose your job, face a medical issue, or come across any other emergency.

In other cases, experts recommend keeping a decent amount for emergency purposes in a simple savings account and transfer a significant chunk to an account or other financial instrument that earns you higher returns. You can use this accumulated money to meet bigger expenses or emergencies.

In conclusion, the secret to leveraging the benefits of a savings account is not just in how much you earn, but more about how you use the account, regulate your spending habits, and how frequently you save. Opening a savings account is free in most cases, making it a valuable reason to have one.

Whether you have big financial goals or dream of building and amassing wealth to live your retired life in style, taking the first step is the way to go. Small actions taken in a planned manner while keeping the bigger picture in view helps you plan better and take the right decisions to operate savings accounts in the most beneficial ways. These accounts help you gain extensive knowledge about the myriad aspects of financial transactions that come in handy while going for bigger investments. The practical experience you master paves the way to plan realistic financial goals and make money work for you in the most lucrative ways possible. It teaches you how and why a methodological financial backup works for you during various stages of life and the steps you can take to leverage maximum benefits with minimum efforts.

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