13 Advantages and Disadvantages of a Savings Account

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If you have extra money lying around after you get your bills paid, what do you do with it? One common option to consider is a savings account. A savings account is a long-term, fundamental money management tool that can help you meet numerous financial needs. It also means you’re placing your money somewhere that is not under your absolute control, since it is being held by a bank or credit union.

Is this money management tool right for your financial needs? By examining the advantages and disadvantages of a savings account, you’ll be able to make the appropriate decision for your financial health.

Here Are the Advantages of a Savings Account

1. Savings accounts will usually accrue interest over time.
Although interest rates have been extremely low since 2007, with many savings accounts having an interest rate below 1%, you will still accrue interest over time with an account. That means you have more earning potential with your money compared to keeping it in a safe at home.

2. Savings accounts in the United States are insured.
When you open a savings account at a financial institution in the US, look for it to say that it is insured by the FDIC or NCUA. This will protect your savings to the maximum amount that is allowed by law. Standard deposit insurance is limited to $250,000 per depositor, per insurance financial institution, per each ownership category.

3. Your funds are still readily available.
With most banks and credit unions, you have online access to your funds 24 hours per day. All you need to have is a data connection or access to the internet. Many institutions will allow you to link your savings account to other accounts you may have, like a checking account, which can help you to avoid costly overdraw fees. This also allows you to quickly transfer funds from one account to another, even outside of regular banking hours.

4. Your money is kept safe.
Because your money is being held by a third-party, it increases your personal safety. Not only does storing cash on your property make you a target for a potential robbery, but losses like that are not always covered by a homeowner’s or renter’s insurance policy. If there was a fire in your home or some other natural disaster, you could lose your cash as well. Keeping your cash in a savings account keeps you and your money safer.

5. You can open an account with very little money.
Many savings accounts can be started for just $25. Some institutions may have an even lower limit, sometimes allowing an account to be opened for as little as $1. This gives you an opportunity to begin saving your money, even if you don’t have much to save at the start.

6. Savings accounts can provide automated bill payments.
Many financial institutions allow bills to be paid automatically out of a savings account without being subjected to the withdrawal and transfer laws. This allows you to save time because you don’t need to manually pay every bill each month and you’re less likely to experience late fees because you missed or forgot a payment. Of course, you’ll need to have money in the account to pay the bill, but if you do, you’ll be able to maintain a better credit score over time.

7. You receive security.
A savings account gives you the opportunity to put away cash in case you have an emergency situation. If you lose your job, for example, you’d be able to draw upon your savings account for your monthly expenses. Or if your water heater goes out, you could tap into your savings to purchase a new one. Think of a savings account as a small insurance policy that can help you maintain your current standard of living if something unfortunate occurs.

Here Are the Disadvantages of a Savings Account

1. Interest is often compounded monthly, or even annually, by most financial institutions.
There are online banks that will compound your interest on a daily basis, but most traditional banks or credit unions will only compound your interest monthly. This means the full potential of your money isn’t always realized, especially when compared to other investment opportunities.

2. There are withdrawal limits on a savings account.
You can easily transfer money from one account to another with regularity, but in the United States, there are Federal limits on the number and the types of withdrawals you can make per statement cycle. This law is called “Regulation D” and limits you to no more than 6 transfers or withdrawals from each savings or money market account during a calendar month. Checking accounts are exempt from this. Additional transactions are often subject to an “excessive transaction” fee.

3. Some financial institutions charge fees for their savings accounts.
There may be monthly fees charged to your savings account for it to be maintained. To avoid this disadvantage, look for fee-free options at local banks or credit unions for the best results.

4. There are insurance limits.
For the average American, who has less than $5,000 in savings right now, the idea of an insurance limit is not much of a disadvantage. If you do have more than $250,000 in net worth, however, you’ll need to be conscious of where you put your cash to save it so that the account will be fully covered. Insurance on a savings account is nice, but it does have a cap on it.

5. Easy access to money means more temptations to spend it.
It’s a lot easier to spend your money when you have high levels of accessibility to it. For this reason, many choose to use other savings products, such as a Certificate of Deposit, to avoid the temptation of spending it. CDs are a good option because they offer a higher interest rate, but you also lose immediate access to your money unless you’re willing to pay an early withdrawal penalty.

6. You may be required to carry a minimum amount.
If your savings account is a money market account, then many institutions may require you to have a minimum of $2,500 in it at any given time. Some institutions require a minimum monthly balance to maintain the account. If your savings falls below this amount, then high fees may be charged on a monthly basis until you restore the required minimum balance.

The advantages and disadvantages of a savings account involve cash access, long-term capitalization, and safety. Consider each key point and you’ll be able to determine if starting a savings account or continuing to maintain the one you have is the right decision for you.