When you are taking a look at where to put your money to grow it, it may seem like a savings account is antiquated. It certainly looks like it doesn't offer much return on investment when comparing, say, a 1% interest rate with, say, an investment with a bullish stock. But the reason savings accounts continue to exist is because they are useful. While growth may be slower, they are guaranteed whereas the stock market is a gamble. And by now you have heard time and time again about compounding interest. No? Let's look at an example.
For every dollar you have in your account accruing interest, the interest added will also accrue interest. Let's say you open a savings account that earns 1% interest with $1,000 and contribute $100 per month to it for 20 years, you'll have added $25,000 and earned just over $2,640 in interest. However, stretch that to 30 years and your total contributions will be $37,000 but with the compound interest, you will have over $43,000 saved – an extra $6,000.
Still think that is small potatoes?
Sock away $1,000 each month and in 30 years, with your $361,000 in contributions, your savings will be at $418,766 – $57,766 earned. And that is if interest rates don't change.
But what else can you glean from a savings account besides a low-risk savings vehicle? Let us count the ways.
Savings accounts perks and benefits
You'll earn interest
As I just made clear, savings accounts pay interest on your deposits. If you put your money into a high-yield savings account, you could earn even more. These accounts are "high-yield" because they have a higher Annual Percentage Yield (APY). (APY is the interest earned in a year.)
The national average for interest in a savings account is 0.07 yet online banks, which do not need to fund operating costs across multiple branches, are offering as much as 1%.
Access to funds
While a retirement fund such as an IRA and 401(k) are must-have savings accounts, withdrawing from your accounts comes with penalties and hefty fees. Other ways to save include money market accounts and certificates of deposit (CDs), but these tie up funds for a set period. A savings account, however, is your easy-access account. A savings account is a place to set up a vacation fund, create an emergency fund
, or save for the down payment of a house. Once you have met your needs, you can withdraw the funds when you need them. These deposit accounts can be set up through a brick-and-mortar financial institution, aka a traditional bank or credit union, or through online banks.
A savings account is a separate account from your checking account. Some bank accounts like Ally and Capital One 360 allow you to have buckets or multiple savings accounts for your goals.
I used Capital One 360 for my savings and have unique accounts for:
- Emergency fund (3 to 6 months worth of funds in the event I should lose my income)
- Vacation fund
- Business taxes (as a freelancer, I have to pay quarterly taxes and I use this bucket to set aside the funds until the tax period due date)
- Pet fund (just in case there is an emergency)
Having savings buckets helps me to have targeted savings accounts where I can be specific about what that money is for. When I first started saving, I had a sum of money in a savings account but I was always making excuses about why I should transfer money out of it. Now I can nickname the accounts so it’s very clear what the purpose is and I only touch the money for that specific reason.
Automatic transfers make saving money easier
One of the best benefits of having a saving account is that you can schedule automatic transfers from your checking account. You can transfer a specific amount once a month or every week or around payday. For example, you can schedule a $50 transfer from your checking account to your savings account after each payday. That way you can ensure you have money in your account and you can actually “pay yourself first
Automatic transfers are good for a few reasons:
- It’s convenient. Who doesn’t want to make their life easier? Through automatic transfers, you can save without thinking about it. It’s one fewer thing to get done on your to-do list. Automatic transfers are convenient and make saving a breeze.
- Helps you ditch excuses. When left to your own devices, you might make excuses on why you can’t save. You forgot, you can’t afford it this month, you don’t want to, etc. When you set up automatic transfers, you get rid of the mental work of deciding to save money. Automatically saving means one less decision to make and you get out of your way to ensure your financial future is taken care of.
- Creates a habit. Once you set up automatic transfers, you’ll realize saving money is easy and you don’t have to think about it. More importantly, you’re creating a habit by doing something over and over again. Saving money is a habit that is like building a muscle — you need to keep doing it again and again. Automatic transfers help you build the habit of saving easily.
The good news is you can always change the frequency or amount of your automatic transfers. So if you hit hard times, you don’t need to stop completely you can just lower the amount or reduce the frequency.
Just as your linked checking account move funds into your savings account, many linked accounts can provide automatic overdraft protection. If your checking account balance goes into the negative, rather than be charged up to $35 per transaction while it is negative, your bank will automatically pull the funds from your linked savings account to stop you from being overdrawn and amassing over-the-limit fees.
That said, savings accounts are typically limited to six transactions or less a month, and if you withdraw funds more than that you will find yourself paying fees.
Deposits are FDIC-insured
When you put money into a savings account, your deposits are insured by the Federal Deposit Insurance Corporation (FDIC). When you see the words “Member FDIC” you can rest assured that your savings are insured up to $250,000.
The FDIC is a federal entity that strives to protect consumers’ deposits if a bank goes under. As of now, the FDIC has never lost a member any money. So if you or a friend feels like saving money in a mattress is a good idea, consider the fact that FDIC insurance covers a hefty amount with a savings account.
Low to no startup costs
Most banks offer savings accounts that have no initial deposit or minimum balance requirements to open an account. This means you don’t need to have a lot of cash to open up an account, which makes the barrier to saving easier. Also, mobile banking makes it even easier to open a savings account, without visiting a branch.
For banks that require an opening deposit or a minimum account balance, you might be hit with a monthly maintenance fee until you reach the requirement.
Best banks for savings accounts
There are many different options if you want to open a savings account. Below we’ve listed some of the banks that offer great savings account, most with high-yield APY.
Capital One offers the 360 Performance Savings account which has no fees or minimums. The company says their Annual Percentage Yield (APY) is 5x the national average rate, so you can get a higher return on your deposits. Its current APY is 0.40% and you can set automatic transfers for set savings plans, track savings goals, transfer funds between linked Capital One accounts as well as other online banks, and deposit checks into the 360 Performance Savings account.
If you have multiple savings goals, you can use Ally Bank which allows you to have “buckets” for your savings. So you might have a vacation bucket, a home improvement bucket, and a rainy day bucket. Ally’s savings accounts have no fees or minimum balance requirements. The bank also offers a higher APY at 10x the national average, currently at 0.50%. If you choose to open a checking account with Ally, it also earns interest, which is uncommon for checking accounts. With $0 minimum balance you can earn between 0.10 to 0.25%.
Marcus by Goldman Sachs
Marcus by Goldman Sachs has a savings account that has no minimum balance requirements as well as no fees. You can have unlimited withdrawals and get a higher APY – currently at 0.60% – than a traditional savings account. Funds can be transferred and deposited by domestic wire, other banks, between accounts, and via check.
Citi Savings has a minimum opening deposit and allows for easy transfers between Citi accounts and other banks. This basic account earns between 0.04 to 0.13%. But go for the Citi Accelerate, the bank's high-yield savings account that offers 0.70% APY.
Bank of America
Bank of America Advantage Savings has some unique features. They have the Keep the Change program which rounds up your expenses on your debit card and puts the spare change in savings. Also, they have tiered interest rates, so as your accounts grow larger your APY may get a boost too. There is a $100 required opening deposit and a $500 minimum balance requirement. If you don’t have $500 in your savings account, you’ll pay $8 per month. Alas, the APY is only 0.01%.
The bottom line
Having a savings account is a must for everyone. You want to have money set aside for emergencies as well as your life goals. As you can see savings accounts come with many benefits and perks and can help make sure you stay on track with your money goals.