Why You Still Need A Savings Account

The good old savings account. It was probably your first experience saving money. Little did you know how important this would be to your future financial success.

These accounts allow you to keep your money in a safe place while it earns a small amount of interest each month.

And since banks are dependent on them in order to make a profit, almost anyone can set one up.

What you may not have realized is that this account is the back bone of your personal finances.

What is a Savings Account?

These accounts are one step above your piggy bank. I know that doesn't sound very glamorous. But remember that a savings account also shows up on your personal balance sheet. And as you deposit money in it, the balance grows and you start to tick off those monthly financial goals.

You get a very low level of risk (your money is insured by the FDIC), in exchange for a very low level of return (interest rates are low). The process is pretty simple:

  1. Go to your local bank or credit union or find an internet bank and fill out the paperwork needed to open a savings account
  2. Make an initial deposit
  3. The bank records the amount of money in your account
  4. After recording your balance, the bank loans your money to other people
    • Banks charge a higher interest rate on the loan then they pay you on your account - the difference is how banks make money
  5. Each month, the bank pays you interest on the money that you leave in the account


Why You Need a Savings Account

You need one because it is the safest place for your emergency fund. You know; that fund that you need at the drop of a hat when something unexpected happens.

By having your emergency fund here (verses a traditional investing account), you sacrifice returns for immediate access. But as anyone who has had an emergency can tell you, immediate access becomes much more important than return.

The argument can be made that having your emergency fund in an interest bearing checking account will give you the same type of return and just as much access.

I can't disagree. But I do know that if your emergency fund is in your checking account, you will spend it. Remember - out of sight, out of mind.

Advantages
  • Liquidity
  • FDIC Insurance
Disadvantages
  • Low return rates
CAUTION: Some banks will try to charge you fees for opening a savings account. DO NOT LET THEM. There are more than enough banks that offer fee-free accounts, so take your money elsewhere. You are doing them a favor by putting your money in their hands.

Also, don't deposit your money in an account that has minimum balance requirements unless you plan on keeping your balance above the minimum.

Factors affecting Your Returns

The current interest rate is the factor that affect returns.

Interest is normally compounded on a daily basis. This means that the bank is paying you a small amount of interest every day, even though the interest payments are only deposited into your account at the end of the month.

Where to Open a an Account

Local/Regional/National Bank
    These days, there isn't much difference between local, regional, and national banks (at least in terms of risk/return). Choosing between these banks really comes down to other services you may need (loans, certificates of deposit, etc.).
Community Banks / Credit Unions
    Credit unions offer members slightly better interest rates than the local/regional/national banks, but not as high as online banks.
Online Banks and Brokers
    If you only need a savings account, and don't mind not having a physical location nearby, online banks are the way to go. You can access your money via their websites and electronic transfers. Online banks usually offer higher interest rates because running their business online is cheaper and the savings are passed on to you.

Ready to Open an Account?

Check out Mint.com. It is as great resource for filtering through different banking, investment, and insurance options.

You can find many blogs on bank rates using Google/Yahoo!/Bing. One example is MoneyRates.com, which regularly monitors rates from 200+ banks (both local and national).

As mentioned above, online banks usually have higher interest rates, but be sure to check out restrictions on moving money. Most online banks limit the number of transactions you can have per month and/or the amount of money you can move at one time (this is how they keep costs down).