Pros of a savings account include having a safe place to store your money, and the ability to potentially accrue interest. The major con includes not being able to utilize funding because it’s sitting in an account. However, having some extra money saved away in an account is usually always a good idea.
There are lots of steps to managing your money properly. And a good financial profile should include a plan to save money. Whether it’s college tuition, a dream vacation, or retirement, savings accounts help us realize our goals by funding them.
A savings account can also act as an emergency fund to help you avoid creating more debt with payday loans or other unreliable forms of funding. Before you decide what is best for you, let’s look at the pros and cons of a savings account.
What Is a Savings Account?
A savings account is a deposit account at a bank or credit union account that stores your money. You can get a savings account at just about any brick-and-mortar financial institution.
Because they are supposed to hold money for a long time, savings accounts typically come with restrictions on how much or how often you can withdraw money and transfer funds without paying a monthly fee.
Most savings accounts accrue interest. Savings account interest rates vary from bank to bank. As a consumer, you want to shop around for a savings account with the best interest rate so that you can make the most out of your money.
A savings fund can also help you deal with unexpected expenses. Many borrowers without savings turn to online loans or a personal loan when they’re in a bind. But if you have money set aside, you won’t need to. There are also special loans, called share-secured loans, that require the borrower to have a savings account as collateral.
Savings Account Breakdown
| Feature | Traditional Savings Accounts | High Yield Savings Accounts | Money Market Account |
| Interest Earning | Low rates, stable. | Higher rates, more variable. | Moderate to high rates, often higher than traditional. |
| Accessibility | High, with physical branch access. | Primarily online, limited physical access. | Good, often with check-writing and debit card options. |
| Online Banking | Widely available. | Core feature, often with advanced digital tools. | Widely available, varies by institution. |
| Account Opening Requirements | Generally low or no minimum deposit. | May require higher initial deposit. | Often higher minimum deposit than traditional accounts. |
| Monthly Fees | Some have no monthly fees; others may charge. | Often no monthly fees. | May have monthly fees unless minimum balance is maintained. |
| Liquidity | High liquidity with easy access. | High liquidity, but primarily online access. | High liquidity with check-writing and debit card access. |
| FDIC Insurance | Up to $250,000 per depositor. | Up to $250,000 per depositor. | Up to $250,000 per depositor. |
| Automatic Savings Options | Often available. | Commonly available, with robust automation features. | Often available. |
| Suitability | Ideal for basic savings needs and early access. | Best for higher interest earnings with online management. | Suitable for those seeking a mix of checking and savings features. |
| Withdrawal Restrictions | Limited to 6 withdrawals per month (Regulation D). | Limited to 6 withdrawals per month (Regulation D). | Limited to 6 withdrawals per month (Regulation D). |
| Bonus Features | Basic features, easy setup. | Advanced digital tools, potential for rate bonuses. | Potential for combined checking-savings benefits. |
Federal Deposit Insurance Corporation (FDIC)
Did you know that your savings account comes with insurance? The Federal Deposit Insurance Corporation, also known as the FDIC, was created by Congress in 1933 after the run on banks during the Great Depression caused many of them to fail.1 The FDIC’s job is to help maintain the stability of the nation’s financial system by insuring bank deposits for American consumers. Additionally, the FDIC examines and supervises financial institutions for safety, soundness, and consumer protection; makes large and complex financial institutions resolvable; and manages receiverships.
What does the FDIC’s protection mean for you? It means that the money that you deposit in a savings account is there when you need it. If you bank with a federally insured financial institution and it fails, the FDIC guarantees your savings account deposits up to $250,000.
With the majority of all banks now offering FDIC coverage, many consumers now face less uncertainty about their deposits. As a result, banks have a better opportunity to address problems under controlled circumstances without causing a panic that scares people into rapidly withdrawing their money.
There are financial institutions that are not members of the FDIC. The federal government does not back the accounts in these banks and credit unions. Financial experts strongly advise consumers to check their institution’s these banks and credit FDIC membership status before they open a savings account with them. It’s easy to spot: look for the “member FDIC” bank logo wherever you want to deposit your savings.
Types of Savings Accounts
There are three types of savings accounts, each with advantages and disadvantages:
Regular Savings Account
The savings account with which you’re most likely familiar. It allows easy access to your money and earns interest. Your savings account balance will grow safely, steadily, yet slowly.
Online Savings Account
An online savings account is available through an internet-only bank.
Online savings accounts follow the fundamental structures of regular banks and allow direct deposit by taking pictures of checks and online transfers. They offer reasonable interest rates and minimal fees but lack a personal connection with regular bank/customer relationships.
Money Market Account
A money market account is a high-interest account that allows check writing and debit card privileges. Although they act like checking accounts, they have savings account features and restrictions—like minimum balances requirements. The ideal account has no monthly fees and a low minimum balance.
Certificate of Deposit
A certificate of deposit (CD) is an account that requires you to hold money in it for a certain amount of time. CDs come with term limits that range from a few months to five or more years. During that time, your money earns a much higher interest rate than a regular savings account. CD interest rates remain locked until the end of their term. That’s great for security, but it also prevents your money from benefiting from an overall rise in interest rates. Additionally, you cannot withdraw from a CD before the end of the term without paying a hefty penalty.
Difference Between a Savings Account and a Checking Account
You should use your savings account and checking account differently. A checking account is for accessing your money for everyday needs by using checks or a debit card.
While checking accounts are “spend” accounts, savings accounts are better used to grow your money. They don’t provide quick access to your funds—which will typically earn more interest than sitting in a checking account.
Knowing the difference, and how each one works is crucial. Having a bank account will even make it easier to get loans.
Should I Link My Checking and Savings Accounts?
It is a good idea to keep your savings account in the same bank as your checking account. Having multiple accounts at the same bank or credit union often entitles customers to perks like unlimited transfers and low monthly maintenance fees.
However, linking your checking account with your savings account has its advantages and disadvantages.
You may find it easier to manage two linked accounts. When they are connected, you will have the ability to send transfer money between your checking and savings accounts easily and quickly.
On the other hand, having too much access to your savings account could be a bad idea. With the option to dig quickly into your savings, you may decide to make purchases that you can’t afford.
In the end, the choice to link the two accounts will come down to how much access you want to your savings. But, the less you touch your savings account, the more money you’ll have when you need it.
Advantages of a Savings Account
A savings account gives you a place to put your money apart from your regular spending money. Savings accounts come with security features and insurance that will protect your money for you.
Remember that with a savings account, your money is making money. Interest brings the best benefit to your money if you don’t touch your savings account for a long time and make regular deposits.
The money in your savings account remains liquid. So if you need to make a withdrawal from your savings account, your money is immediately available.
Disadvantages of a Savings Account
While the availability and reliability of a savings account are excellent, it is not the option that earns you the most significant return on your investment. Stocks, bonds, and Treasury bills will earn much higher returns.
Some savings accounts come with rules for minimum balances, which means that you have to replace any withdrawal that puts you under the required minimum.
Savings accounts do not offer fixed interest rates. Your financial institution has the right to alter the rate as they see fit.
And although the money in your savings account is liquid, that accessibility may be a problem. If our money is readily available, we are more likely to spend it.
Savings Account FAQs
Traditional savings accounts typically offer lower interest rates but are widely available in most banks and credit union facilities. High-yield savings accounts, on the other hand, offer significantly higher interest rates, often found in online banks, but may have more stringent requirements or limited physical branch access.
An interest-bearing deposit account is a type of bank account where the deposited funds earn interest over time. The minimum balance requirement is a set amount that the account holder must maintain in their account to qualify for earning interest. If the account balance falls below this minimum threshold, the account may either earn less interest or none at all, depending on the bank’s policy. This requirement encourages customers to keep a certain level of funds in their account to take full advantage of the interest-earning potential.
Savings accounts pay interest, but the rates are typically lower than those of other investment vehicles like stocks or mutual funds. High-yield savings accounts and money market accounts may offer better rates, but still generally lower than riskier investment options.
Minimum balance requirements mean that the account holder must maintain a certain amount in the account to avoid fees or to earn the stated interest rate. Falling below this minimum can result in charges or reduced interest earnings.
Direct deposit can offer convenience and faster access to funds. For some savings accounts, setting up a direct deposit can also waive certain fees or help in meeting minimum balance requirements.
While savings accounts are typically insured (e.g., by the FDIC in the U.S.), the insurance limit is capped (usually at $250,000 per depositor, per insured bank, for each account ownership category). This means that larger balances exceeding the insured limit may not be covered.
Consider factors like interest rates, balance requirements, account fees, accessibility (online vs. physical branches), and additional features like direct deposit or mobile banking capabilities.
High yield savings accounts often have lower overhead costs, especially if offered by online banks, allowing them to pass on the savings to account holders in the form of higher interest rates.
Yes, many savings accounts, including high yield and money market accounts, have transaction limits due to regulatory requirements. These limits are in place to encourage saving rather than frequent withdrawals.
Yes, the interest rates on savings accounts, including traditional and high yield accounts, can fluctuate based on the broader economic environment, such as changes in the federal funds rate or banking regulations.
CreditNinja’s Take On Savings Accounts
The advantages and disadvantages of having a savings account can mean different things to different people. But, having some cash reserve for emergency situations is essential to living a stable and healthy financial life.
Savings accounts are a great way to manage that kind of reserve. However, CreditNinja suggests you study all of the savings options available to you. And most importantly, pick a savings account option that you can stick with. The best thing you can do for your future is to start planning for it right now.
And if you need more information on how to open a bank account with bad credit, check out the rest of the CreditNinja Dojo!
References:
- Federal Deposit Insurance Corporation | FDIC.gov
- Savings Account Definition | Investopedia
