Incorporating a savings account into your financial strategy may improve your chance of reaching your financial goals. However, a savings account may not always be the right fit for every financial situation. Let’s take a look at the benefits and drawbacks of keeping money in a savings account.
Short-term vs. long-term goals
For longer-term financial goals like retirement savings, investments that offer higher returns may be more effective than a savings account. So why would you put money into a savings account?
Savings accounts are a low-risk way to put funds aside. Plus, you have easy access to funds when needed. Whether saving for a car or vacation, savings accounts make it easier to reach shorter-term goals.
Advantages of savings accounts
Financial planning is the first step to achieving financial independence and stability and reaching your goals. This requires managing income, expenses, investments, and debt carefully. You may already be tracking cash inflows and outflows from your checking account, so what is the point of a savings account?
Easier budgeting
A budget gives every dollar you earn a job. While most of your money may go to paying daily expenses, you can build your savings goals into your budget. A savings account helps separate the money you want to save from your checking account.
Saving money can be a tough habit to start. Consider setting up part of your salary to be directly deposited into your savings account. You can also set up automatic transfers from your checking account directly into your savings account to ensure you save money regularly. Saving money becomes second nature when done automatically.
Good for goal-setting
A savings account can be a useful tool on the path to reaching financial goals. How much to put in a savings account depends on what you are trying to accomplish. Whether you plan to buy a house or save for your child’s education, a savings account provides a safe place to store and easily access money.
Monitor your balance over time by keeping funds in separate savings accounts and earmark each savings account for a different goal. You can park your money in a high-yield savings account, earn interest, and watch your balance grow over time. Seeing your savings grow is a strong motivator to help you stay on track with your goals.
Build your emergency fund
Financial emergencies can wreak havoc on your household budget. If your car breaks down or you lose your job, you could fall behind on your monthly obligations. Without any savings, you may have to take out high-interest debt to pay the bills.
Prepare for the unexpected with an emergency fund. Regularly putting aside funds into your savings gives you that extra cushion when you need it.
Low risk
Savings accounts are less risky than investments, which can be volatile. The biggest difference between saving and investing is if you put your money in stocks or other investments, you could lose your entire investment. So, why have a savings account? The Federal Deposit Insurance Corporation (FDIC) insures savings accounts for up to $250,000 per deposit account type. You don’t have to worry about losing all of your money if your bank fails.
Disadvantages of savings accounts
Savings accounts are a secure way to save money, but they have drawbacks. Understanding the disadvantages helps you determine how much to put in a savings account.
Low interest rates and fees
Savings accounts earn interest, but the rate is typically less than other investments. Investing your money in a savings account may not be optimal if you seek a greater return. Additionally, some savings accounts charge fees for certain transactions or when you don’t maintain a minimum balance. If you aren’t careful, bank fees could wipe out your interest earnings.
Opportunity cost
If you keep all your funds in a savings account, you won’t have access to investment options with higher returns. If you have longer-term financial goals and are comfortable taking risks, investing in stocks, bonds, or other assets may earn you more money. Keeping money in a savings account has the opportunity cost of missing out on those returns.
Create a customized financial plan with a professional
A financial advisor will help you determine how to allocate your funds between savings and investment accounts to secure your financial future. Their skill and expertise can help you bridge the gap between your finances today and where you want to be. With our advanced matching solution, FinanceHQ connects you with proven finance experts who provide tailored advice in your best interest.
