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Do You REALLY Need a Savings Account?
A savings account can keep your money safe and help it grow over time. Did you know that over a quarter of Americans don’t have a savings account?1 That percentage is even higher among young millennials (aged 25-34), with 31% of this group lacking a savings account.
You may ask yourself why you need a savings account, especially if you already have a checking account. There are several benefits to having a savings account, such as growing your wealth over time.
Below we’ll dig into some benefits of having a savings account, and some items to watch out for.
Key Takeaways
A savings account is a crucial tool that could help grow and protect your wealth.
Some key benefits of having a savings account include FDIC insurance and the ability to earn interest over time.
There are a few things to watch for when choosing a savings account, like fees and minimum balance requirements.
What Is a Savings Account?
A savings account is an interest-bearing deposit account. Unlike a checking account that is used for day-to-day transactions, savings accounts are typically used to store money.
Most savings accounts earn at least a small Annual Percentage Yield (APY) on the funds you keep in the account. Historically savings accounts haven’t provided high returns, but the rise of digital banks has pushed many financial institutions to offer more competitive rates.
In 2013, the national average savings account rate was 0.06% APY.2 As of April 15, 2024, the national average savings account rate was 0.46% APY.3 On the other hand, digital banks were offering rates at 5.00% APY or higher.4
Savings accounts utilize compound interest, which may help grow your money faster. Checking accounts, on the other hand, typically don’t earn interest on the funds you keep in them, meaning your balance only grows when you make deposits.
Why Do I Need a Savings Account?
Opening a savings account is often an essential step in achieving financial stability and reaching your long-term savings goals. It offers a secure way to store your money while potentially growing your wealth over time.
Let’s take a look at some of the top benefits of having a savings account.
Protects Your Deposits with FDIC Insurance
When you open a savings account with a chartered bank, your money is typically protected by the Federal Deposit Insurance Corporation (FDIC). Many chartered banks and financial institutions offer this deposit insurance to protect your money in case the financial institution fails.
FDIC insurance is not something you have to pay for—it’s covered by the bank. Your deposits are insured for up to $250,000 per depositor, per account type, per institution.5
When choosing a savings account, check to see if the institution is an FDIC member. There are some financial technology companies, often called neobanks, that offer savings products but, due to their lack of banking charter, don’t necessarily keep customers’ deposits in FDIC-insured accounts.
Neobanks often partner with chartered banks to provide FDIC insurance by keeping customer deposits at the partner bank. Be a smart shopper and understand where your money is kept and how it may be protected before handing it over.
Gives Quick and Easy Access to Emergency Funds
A savings account may also a good place to store your emergency fund (and likely safer than keeping cash in your mattress).
While some may argue that having cash on hand offers you the quickest access to your money, in the digital age, online payments and transfers are becoming more common. Additionally, if you keep money in your home, your homeowner’s insurance usually only covers cash up to a certain limit, typically ranging from $200 to $1000.6 This means if cash is stolen or destroyed, you may not be able to recover it.
Since savings accounts typically offer easy access to your money, you have the opportunity to draw funds from the account in the event of an emergency.
Makes Setting Money Aside Easy
Most banks allow customers who have both a savings and a checking account to transfer money between the accounts almost instantaneously, making it possible to quickly move money into savings—an account that is likely earning better interest. And then, when money is needed for emergencies or necessities, the money could be moved just as quickly back into checking.
You may even be able to set up automatic transfers from your checking account to your savings account, which could help you build your savings even quicker.
Curbs Spending Temptation
“Out of sight, out of mind” may be true for savings. Keeping money in a dedicated savings account instead of in your wallet or checking account could make it easier to curb your impulse spending. When you set money aside in your savings account, you’re effectively removing it from the immediately spendable funds kept in your checking account or the cash in your wallet.
You could always withdraw funds if you choose to make a purchase, but by separating your savings from your checking account, you give yourself a little extra time to make sure that buying certain items are what you want to do.
If you still want to have money on hand for occasional indulgences, you may want to establish a splurge fund. This way you are able to set aside a specific amount of money for spontaneous purchases without impeding other goals.
Grows Your Money with Interest
As mentioned, money held in savings accounts typically earns interest over time and at rates typically higher than checking accounts. The amount earned in savings accounts varies by institution, depending on the Annual Percentage Yield (APY) offered. Banks use APY to describe how much the money held in an account earns over a period of time, taking into account the effects of compound interest.
If you choose a savings account with a competitive APY, your money may grow more significantly over time. For example, if you deposit $5,000 into an account with a 5.00% APY that compounds daily, it will be worth approximately $5,256 after one year,7 assuming the APY remains the same throughout that time, daily compounding, and no withdrawals or additional deposits are made.
This growth could help you both retain your spending power during spans of inflation and grow your wealth over time.
Builds Funds with Less Risk Than Investments
When you invest in the stock market, your money could lose value over time depending on market conditions and the stocks’ performance. Most savings accounts, on the other hand, aren’t subject to the ups and downs of the stock market (of course, check the fine print of your account). The only time your balance could go down is if you make a withdrawal. And if you choose a high-yield savings account, your money grows at a more competitive rate compared to traditional savings and checking accounts.
Keep in mind that the APY you earn depends on the prime rate set by the Federal Reserve and may fluctuate over time. When the prime rate is high, your returns are higher. When the prime rate is low, your returns are lower.
Savings Account Watch Outs
Just like any financial decision, choosing a savings account requires careful consideration and research. Here are a few things to watch for as you think about opening a savings account8:
Minimum balance requirements. While many banks have done away with minimum balance requirements, some still have these in place.
Fees. Some institutions charge customers fees for different things, including maintenance, transfer, or not maintaining a sufficient balance.
Low rates. Depending on the institution, the APY on a savings account may be as low as 0.01%. With rates that low, it’s difficult to grow your money over time.
Tiered rates. Some institutions offer different rates depending on the balance in your account.
Bonus offers. Some institutions offer new customers higher rates or a “bonus” if they deposit a certain amount of money during a specified time period.
While banks may draw you in with flashy offers, make sure you to do your research on your account to avoid any surprises down the line.
Final Thoughts
Opening a savings account may not seem necessary if you don’t have a lot of cash to keep in it. But it may be a great way to start growing your money over time. These accounts may offer a secure and low-risk place to store your funds while still making them accessible when you need them.
When you start looking for a savings account, be sure to look for competitive rates and watch for any fine print outlining fees, penalties, and other conditions while you compare your options.
Ready to open a savings account that earns a competitive APY? Jenius Bank is here to help. Check out our savings account and open yours today.