Savings Account Advantages and Disadvantages

There are several savings account advantages and disadvantages. Three advantages of savings accounts are the potential to earn interest, it’s easy to open and access, and FDIC insurance and security. Three disadvantages of savings accounts are minimum balance requirements, lower interest rates than other accounts/investments, and federal limits on saving withdrawal.

If you’re fortunate enough to have extra money for long-term goals, first, pat yourself on the back! Saving is so important and yet, so challenging for most people. Next, figure out how to make that extra money work for you. These days, there are so many ways to use, grow, and save your money, including good old-fashioned savings accounts.

Savings accounts are usually the first bank account that anyone opens to put aside money for the future and create or preserve wealth. Children could open a savings account with a parent to develop a culture of saving. Teenagers open savings accounts to keep cash earned from home chores or their first job. A savings account is an excellent way to keep emergency cash for unexpected emergencies or life events. The opening of a savings account also signals the commencement of the relationship between you and a financial institution. For instance, when you join a credit union, your membership is established by your “share” or savings account.

Many people ignore savings accounts due to the relatively low long-term interest rates offered in comparison to other long-term investments. Before you decide, check out their advantages and disadvantages.

Common Savings Account Advantages and Disadvantages

Savings Account Advantages

1. Access and availability. Savings accounts are easy to open and you can withdraw and deposit money anytime (within federal limits) at ATMs or via 24-hour, online access, unlike long-term investment accounts. Many institutions will allow you to link your savings account to other accounts, like a checking account, which can help you to avoid costly overdraw fees. This also allows you to quickly transfer funds from one account to another.
2. Protection. A savings account at a bank that is a member of FDIC, (Federal Deposit Insurance Corporation) insures your money for up to $250,000. If you use a credit union covered by NCUA insurance, your account is also covered up to $250,000.
3. It’s a liquid asset. Savings accounts deal in cash, which means you don’t have to worry about selling investments or making other complicated moves to access your money.
4. Savings accounts accrue interest. Although interest rates have been extremely low since 2007, you will still accrue interest over time with a savings account. The rates depend on the bank, but the national average is about 0.09 percent, with high-yield interest rates of up to 2.05%.
5. Low startup requirement. Many savings accounts can be started for just $25. Some institutions allow an account to be opened for as little as $1, so you can begin saving with even a modest amount.
6. Automated bill payments. Many financial institutions allow bills to be paid automatically out of a savings account without being subjected to the withdrawal and transfer laws, helping you avoid late fees or missed payments.
7. No lock-in period. You’re not locked in for any period of time, which means you can switch savings accounts as often as you like.

Savings Account Disadvantages

1. Minimum Balance Requirements. Most savings accounts have minimum balance requirements or monthly maintenance fees. If your savings account falls below the minimum balance requirement, the bank will deduct fees from your account, negating from interests you earned.
2. Low Interest Rates. Interest rates are lower compared to other types of accounts or investments, such as money market accounts or certificate of deposits (CD).
3. Federal Withdrawal Limits. Due to Regulation D, savings accounts have federal limits when withdrawing funds, which is six times per month. The banks will charge you a fee if you exceed the federal limits, or they can change your account from savings to checking accounts if you continue on withdrawing more than six times per month.
4. Access and availability. Yeah, we know this is in the advantage category, too, but if you find easy access to these funds is too much of a temptation, then that could make long-term saving difficult.
5. Rates can change. Savings account interest rates are variable, meaning that financial institutions are free to set and change interest rates as they wish. High-interest savings account rates will stay largely in line with the movements of the federal rate.
6. Inflation. If your savings account doesn’t pay a competitive interest rate, inflation could be eating up the value of your earned interest, leaving you with an account balance that’s worth less a year from now than it is in today’s dollars.
7. Compounded interest. Most traditional banks or credit unions compound your savings account interest monthly, or even annually. This means the full potential of your money isn’t always realized, especially when compared to other investment opportunities.

Establish Good Saving Habits

If you want to start saving, here are three tips to get you started on the right foot:

• Track your spending or get an electronic app to help you do so. If you realize that you’re spending too much on personal expenses or non-necessities, cutting back on those can give you money towards a savings account.
• Set up an automatic savings plan. This feature automatically transfers a small portion of your paycheck into your savings account, so that you can “pay yourself first” and develop a habit of saving.
• Joint accounts. Consider opening a savings accounts with your partner so that you can save together.

Is a Savings Account Worth It?

The benefits of a savings account aren’t in how much you earn. Instead, you’ll want to consider the purpose of your account, and the liquidity and access you have. When it comes to your emergency fund, a savings account is likely the best choice. Some experts recommend having at least six months of living expenses in a savings account just in case, but even having a few thousand dollars in the account can help in a pinch. Consider also the specific savings account advantages and disadvantages before making a decision.