Without a doubt, a savings account is worth opening. They make it easier to plan ahead for extra expenses, whether they're planned (like a future vacation) or unplanned (like car repairs). Though interest rates aren't as high as they were back in Grandpa's day, a savings account is still worth opening. Keeping and building savings gets you into the habit of planning ahead and taking on the "save now, buy later" mindset. In the following, we'll look at the benefits and downsides to the simple savings account so you can build a smart saving strategy.
Benefits of having a savings account
The classic savings account is the go-to financial tool that, when used properly, can make life much less stressful. In the following, we’ll show some of the smart ways it can help you achieve more with what you have.
Achieve your savings goals
Whether you’re saving up for a new sofa or a down payment on a car, a savings account provides a place to park that money and track your progress. Keeping track is a great way to build momentum!
Build your emergency funds
One of the realities of daily living is things don’t always go to plan, and a savings account can be your backup when things go wrong. No one is ever thrilled to pay $1,500 for car repairs. But it’s certainly much less stressful when you know you have the cash on hand — and no credit card balance to pay down.
Read more in Ready, set, save! 4 steps to build your emergency fund
Pay off deductibles
For many people, choosing a high-deductible plan for automobile or medical insurance is part of their financial strategy. While you’ll pay lower premiums, there’s a tradeoff to the lower price. When you make a claim, you’ll be on the hook for the $500, $1,000 or even $2,000 in deductibles before the insurance kicks in. Maintaining a savings balance that lets you pay down the deductible can bring a sense of relief in a trying situation.
Stay out of the debt churn
Have you ever worked hard to pay off a credit card balance, only to have to use it again to cover some unexpected cost? That’s the debt churn, and if you keep it going, you’ll end up paying hundreds or even thousands in interest costs over the years. If you’re trying to get out of debt, the first step is concentrating on building your savings first. That way, when something comes up, you can stop falling back on your credit card and stay out of the debt churn.
Have freedom to move
Do you want to move to a new place? Buy tickets to the concert? Donate to a friend’s crowdfunding campaign? When you make room in your budget for savings, you won’t have to sit on the sidelines or say no to the things that matter most. When life happens, both good and bad, savings lets you be ready for it!
Savings is easily automated
If you already have a debit card, you can link to your savings account for easy transfers. The method of transferring is up to you. You can either log in and do it manually, or you can set up your online account to make a monthly transfer. Try starting with $50 a month. Once that feels comfortable, budget-wise, gradually increase it. As time goes on, you’ll make savings into a lifelong habit you don’t have to think about.
Opening a savings account takes minutes
What do you need to open a savings account? In addition to funds to deposit, you’ll need to provide some basic information to prove your identity:
- Driver’s license, passport or other government-issued identification card
- Social Security number
- Name, date of birth, physical address and phone number
Once your savings account is established, you’ll have a place to park some cash that is easy to access when you need it!
What are the disadvantages of a savings account?
OK, so we’d argue there aren't too many disadvantages to a savings account. But yes, if you don’t have a well-thought-out savings plan, you’ll definitely get dinged with penalties and other costs.
Too easy to access?
The ease of withdrawing and transferring funds from a savings account can be a double-edged sword. It can be tempting to simply transfer the funds to top off your checking account instead of doing the work to fix your budget. For some savers, the easy access ends up stalling their long-term savings plans. In that case, you may be ready to introduce a more strategic savings solution into your arsenal, such as a money market account, certificate of deposit or a Roth IRA.
Looking beyond the basic savings account? Check out Why CDs should be a part of every saver's strategy
Federal withdrawal limits
Let’s say it’s one of those months and you find yourself frequently tapping into savings. Keep an eye on that. Make too many withdrawals and you’ll face a penalty. That’s because under federal law, you can’t make more than six transfers or withdrawals from savings per month. (Otherwise, it’s basically a checking account.) To avoid these penalties, plan ahead and be strategic with your savings withdrawals.
Many banks charge a monthly fee for savings. To avoid these fees, you either have to be under the age of 18 or you have to maintain a minimum balance. The amount of that minimum balance varies by bank, and some are higher than others. For example, a national bank might charge something to the tune of $5 a month when the daily minimum balance falls below $300. When you’re trying to play catchup, that can be a disadvantage.
To avoid high fees, choose your bank carefully. A community bank, for example, tends to have saver-friendly terms that are more conducive to reaching your goals. For example, when you open a Thrift Savings Account at Minnwest Bank, the minimum balance for people 18 and older is $50. That’s how we make it easier for you to grow your savings and set you up for success!
Ready to start? We're here to help.
When you’re ready to start saving and taking your finances to the next step, the experts at Minnwest Bank are here to help. We live and work in your community. So, if you’re looking to take your money to the next level, we're always a phone call or visit away. With our personal savings tools and expertise, our personal bankers are here to help you get things done.