The most noticeable benefit of a savings account is interest earned on money deposited. The interest rate on a savings account is currently very low, but it still provides extra money. A savings account has many characteristics of a checking account, but it offers other benefits. A benefit of having a savings account is that it can create a saving mindset. Finally, a savings account will provide additional security.
A savings account annual interest rate is, as of April 2015, ranging anywhere from .05% to 1%. This may not seem like a high number, but it is still creating money. For example, 1% of a thousand dollars is ten dollars. Current rates can be checked regularly through your institution’s website or other online sources such as http://www.bankrate.com/.
A savings account is a great offer because it has very high liquidity. Liquidity measures how quick an asset or any financial instrument can be converted into cash (usually into a checking account). The process is as simple as doing a quick online transfer from savings to checking. In addition to having liquidity, a savings account is backed by the FDIC in conjunction with a bank’s checking account, or the NCUSIF if your saving account is with a credit union. Your account is insured up to $250,000. (Personal limits also apply if you have multiple accounts.) Basically, a savings account provides interest with zero risk on savings up to $250,000. Specific variations on a savings account, like a money market account, may provide higher interest rates but may limit the amount of transactions that can occur. It is important to talk with a bank or credit union representative to figure out which account fits your needs.
Besides earning interest, savings accounts are great for creating a saving mindset. First, while savings accounts are liquid, the money is set aside from regular checking. This makes it more difficult to spend unexpected amounts of money on any good or service. The process of transferring money from savings to checking creates time to mull over the decision and can prevent unnecessary expensive purchases. However, the money is still available and accessible in times of emergency. Next, taking extra income and depositing into a savings account can develop a mindset more geared towards saving. Saving money is important for achieving future financial goals, and a savings account is the first step in saving and earning interest income.
Finally, a savings account can create additional security for money stored in an account. For example, a savings account has a different account number than the checking account, so if account information were to get stolen, the savings account funds would remain difficult to be stolen. It is a good idea to not link your debit card to your savings account. This will create an extra barrier if your debit card were to get stolen.
In conclusion, a savings account is a great complement to a regular checking account. It provides many of the same features of a checking account but earns interest on the money deposited. It also allows you to create a saving mindset which is important in the long run. Savings accounts can also come in many different styles, so it’s important to contact your financial institution to figure out which is right for you!
Written by Jonathan Alton, Financial Wellness for College Students Peer Educator, and Kathy Sweedler, Consumer Economics Educator, University of Illinois Extension