How To Tell When It's Time to Open a New Savings Account
A savings account is the most basic sort of bank account. And it is appropriate for almost anyone interested in being smart about managing their money. If you are trying to accumulate funds to reach a short- or long-range goal and want to keep your money safe, earning interest and readily available, you are a good candidate for a savings account. Savings accounts do have limitations, however. The interest they pay won’t keep up with inflation, as a rule. And fees may further erode the purchasing power of your dollars.
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Savings Account Basics
A savings account is often the first financial account someone opens. Savings accounts are available from many financial institutions of different varieties. And they’re easy to open, with a minimum of paperwork and hassle. Most have low or no minimums and they pay varying interest rates that will change with the prevailing interest rate trends.
Interest rates paid by savings accounts will generally be less than the rate of inflation, however. This means your money will, over time, lose purchasing power as prices for goods and services rise faster than the interest it accumulates. In order to beat inflation, you will need to put money into investments such as stocks.
A savings account is a place for money that you don’t plan to spend out of soon. And you want to keep your savings account readily available. Keep in mind, savings accounts may have limits on the number of monthly withdrawals. So they aren’t good replacements for checking accounts or money market accounts. However, they do have deposit insurance through the Federal Deposit Insurance Corporation (FDIC), so you can rest assured there is no chance you’ll lose money.
Access to Your Savings Account
You can get access to your money any time by transfer or withdrawal. And, unlike certificates of deposit (CD), there’s no penalty for withdrawing early. But by putting money in a savings account you separate it from funds in a checking account. That creates a psychological barrier that can help prevent you from spending it.
Many financial institutions allow you to set up automatic transfers into your savings account on a regular basis. This can help you build up the size of your account without having to take action to initiate the transfer. You could also link your savings account to your checking account as a way to provide overdraft protection.
Best Uses for Savings Accounts
You can benefit from having a savings account if you have almost any type of short- or medium-term financial goal. For instance, nearly everyone is advised to build up an emergency fund amounting to at least three months of living expenses. An emergency fund gives you a backstop in case you lose your job, become ill and unable to work for a time or experience an unexpected expense like a major car repair.
A savings account provides just the sort of safety, liquidity and convenience a rainy-day fund calls for, with the added benefit of earning interest. Other short-term savings goals a savings account can help with include saving for a vacation, making a down payment on a new car, or paying for a significant consumer goods purchase like a new refrigerator or television.
Long-Term Goals With Your Savings Account
Savings accounts can also help with long-term goals. For instance, it may take several years to save up enough for a down payment on a home purchase. Putting money into a savings account lets it build up safely while earning interest.
Once you have enough for the down payment, you can access the money easily just as soon as you find the perfect house and are ready to apply for a loan. Other long-term savings goals that a savings account is good for include paying for college or funding a home renovation or upgrade.
While savings accounts are very useful, they aren’t the best choices for every savings goal. Financial objectives that are more than 10 years off are generally better addressed with investments that offer the opportunity for more return than a savings account. Saving for retirement, for example, is usually a job for a diversified portfolio of investments such as mutual funds, exchange-traded funds, stocks and bonds.
Bottom Line
A savings account is a financial tool that fits the needs of anyone who wants to manage their money. The combination of safety, liquidity and interest makes a savings account appropriate for both short- and long-term goals. That includes emergency funds and major purchases.
However, the interest a savings account earns will keep up with inflation. So they aren’t ideal for goals such as saving for retirement. Also, banks may limit transactions on savings accounts, so most people will want a checking account as well to pay bills.
Savings Account Tips
A financial advisor can help you come up with a plan to use savings accounts and other financial tools wisely. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
The money you deposit in a savings account will grow over time, but how much? SmartAsset’s Savings Calculator has the answer. Just put in the amount of money you have now, the interest rate stated as annual percentage yield, how much and how often you’ll add to it, and how many years it will be until you expect to need the money.
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