The importance of a savings account is easily overlooked. A checking account is the workhorse of your finances. Your direct deposits, bank cards, and autopay bill accounts are likely connected to your checking account. You may feel like savings are better placed in investments where they can grow over time.
Still, there are plenty of reasons to keep cash in a savings account. These reasons are only increasing, as competition from internet-based companies drives up interest rates and forces banks to offer new convenient features.
If you haven't opened a savings account yet, here are the best reasons why you should consider doing so.
Curb the Temptation to Spend
A savings account forces you to separate a portion of your funds from your everyday spending money. That alone can eliminate the temptation to spend cash that, on second thought, you might prefer to save. Creating barriers to curb impulse spending can help you stick to monthly budgets and avoid debt.
If buying a new video game is as easy as swiping a card, then you might not even consider the cost until the next time you check your bank statement. On the other hand, if you have to take the time to move expenses from your savings into your checking account before you buy, you're more likely to be aware of the cost and the effect it will have on your overall finances.
Prepare for Surprises
A savings account is an excellent place to keep your emergency savings. Everyone should strive to stow away a sizable chunk of cash in case of emergency. You'll never be able to predict when your house water heater tank, your house roof, or your garage door stop to work and needs to be replaced, a major car repair, a temporary loss of income, or any other types of sudden events that catch you by surprise. When something like that does happen, an emergency fund in your savings account will make it easier to land on your feet. It may be a stressful event, but the financial aspect of it won't add to your stress.
If you don't have emergency savings set aside, you may be forced to take drastic measures when tragedy strikes. You could be forced to go into debt, sell belongings, or make personal sacrifices that put your health or safety at risk to make ends meet.
Grow Your Savings
Savings accounts don't pay much, but checking accounts usually don't pay anything, so you're missing out on growth opportunity if you keep all your money in a checking account. Remember, your cash loses value due to inflation, so if you are letting cash sit in an account with zero return (like a checking account), you're actually losing money. It is true that the current interest rates offered by banks for savings accounts might not cover fully the inflation rate but this has not been the case all the time and rates might increase when the economy is growing.
If growth is your primary goal, you may be better served to focus on investment strategies—but a savings account is important, regardless. Unlike all investments (even the comparably "safer" ones), your money is guaranteed in a savings account. Even if the stock market crashes, you won't lose any money, and you'll still earn whatever APY your account guarantees.
Keep Your Money Safe
When you have more money than you need to spend immediately, it’s critical to keep that money safe. There are obvious risks to investments, but carrying cash comes with its own risks, as well.
If you hold physical cash, your money could be destroyed in a fire or flood, it can get stolen, or you might forget where you stashed extra money over time.
A bank or credit union is a much safer place for excess cash. Banks offer physical protection for your money, and FDIC-insured banks (and NCUSIF-insured credit unions) also address the risk of bank failures like identity theft, fraud, and bank errors. The U.S. government protects up to $250,000 per customer per institution. There are also federal laws to protect you against certain types of fraud and errors in your bank account, but you need to monitor your accounts and act quickly after something happens.
Save for Goals
Opening and managing a savings account forces you to organize your finances and makes it easier to plan for the future. Even if you're already planning for the future, it can be difficult to accurately track your savings progress if you keep all of your money in a checking account. To help you organize and minimize fees, look for online savings accounts that let you set up multiple “subaccounts.”
It may even make sense to have multiple savings accounts—one for each long-term financial goal. For example, you might have one account for emergency savings, another account for a vacation fund, and a third account for building up a down payment for a home. Put any extra cash in these accounts to easily track (and ultimately reach) your goals.
Your Cash Is Accessible
Savings accounts are among the most liquid options for your cash. If you need to spend money, it’s easy to transfer funds to a checking account (transfers within the same bank are virtually instantaneous). ATMs will let you draw cash from your account just as fast. Other types of accounts, like certificates of deposit (CDs) or investments in a brokerage account, may restrict your ability to move money quickly.
Keep withdrawal limits in mind. Depending on your bank, savings accounts may have a limit of six transfers or withdrawals per month — previously a rule of the Federal Reserve's Regulation D. In October 2020, with people facing increased financial urgency due to the COVID-19 pandemic, the Fed amended this rule to give banks the authority on whether to enforce or suspend the six-per-month limit.
Accounts Are Often Free
With the number of free savings accounts available, why wouldn’t you have a savings account? Online banks, in particular, allow you to open an account with no minimum balance, and they don’t charge monthly fees. There’s virtually nothing to lose by keeping a savings account open. Credit unions and small local banks also tend to offer free savings accounts. You may even find a welcome deal that pays you in exchange for opening an account. (These kinds of deals usually require you to maintain a minimum account balance for a set amount of time.)
Disadvantages of Savings Accounts
Fortunately, there are very few drawbacks to savings accounts, but it's essential to understand them.
The primary drawback to savings accounts are the relatively low interest rates your money earns. This is by design. No one is supposed to get rich from a savings account. Rather, they're meant to protect money, and the APY should be viewed as a protection against inflation rather than a way to become wealthy.
For longer-term goals like wealth accumulation, a savings account might not be the ideal option. CDs pay more, but you need to lock up your money to earn the highest rates. Money market accounts may also make sense. Stocks have historically offered higher returns, but they come with extra risk.
Still, a savings account could play an important part in your long-term strategy. The money in your savings will be kept safe, which can help balance out any risks you take on stocks, bonds, or other equities.