In a recent survey by GOBankingRates, 17.36% of Americans reported their lack of a savings account. In fact, a whopping 28.91% of those 55-64 years of age do not have a savings account. As this demographic approaches retirement age, that’s particularly concerning.
In contrast, only 13.51% of those aged 18-24 reported no savings accounts. In addition, the survey found that 18.31% of women and 16.25% of men did not have a savings account.
It has been noted in the survey that Americans lack sufficient savings across demographic groups, emphasizing the need to build emergency funds and save.
Still not convinced? Let’s explain why and how a savings account can help you achieve your financial goals.
What is a Savings Account?
Here’s a quick breakdown of what a savings account is for those of you new to finance.
Typically, a savings account earns a modest amount of interest and lets you deposit your money. These accounts are federally insured up to $250,000 per account owner and offer a safe place to put your money while earning interest.
A savings account is a deposit account with a bank or other financial institutions like credit unions that pay interest. These accounts, however, typically pay modest interest rates. The upside is that you can park short-term cash in them with their safety and reliability. In fact, these accounts are federally insured up to $250,000 per account owner
Another perk? To open a savings account, you don’t need much money. Also, you’ll have easy access to your money — although you’ll have a limited number of times per month to access it.
Savings Accounts: How They Work
Savings accounts can be opened either in person or online at a bank or credit union. As with opening a checking account, the process is similar. An account will be opened once you have submitted your personal information and deposited funds.
You’ll start earning interest on your savings account once you’ve deposited money. There are several factors that influence earnings, including your savings account APY, your deposit amount, and how long you keep your money.
Depending on your bank’s policy, interest can compound daily, monthly, quarterly, or yearly. The accrued interest is deposited into your account at the end of each compounding period. You will then begin earning interest on the balance of your new account (deposits plus interest).
As an example, here is how a savings account could be used:
- You open a savings account with a $100 deposit.
- In this account, interest is earned at a rate of 2% a year.
- After one year, the balance in the account is $102.
It is possible for the APY of your savings account to change at any time. However, money can be moved out of the account at any time without penalty. Most institutions limit the number of withdrawals you can make from a savings account per month to six.
Why Everyone Should Have a Savings Account
Your savings account serves as a place to stash some of your money. In many cases, it is a starting point that enables them to pursue specific goals in life that are important to them but require discipline and financial planning.
While there are several reasons why you should open a savings account, these are the main ones.
Provides peace of mind when unexpected expenses arise.
There are always unexpected expenses in life, such as car repairs, medical bills, and job losses. It’s probably for this reason that 90% of Americans say financial considerations impact their stress levels, according to a study from Discover and Thrive Global’s Thriving Wallet.
Savings accounts can provide you with peace of mind knowing that you have a financial cushion to fall back on in times of need. In such a situation, you may be able to avoid incurring debt or selling assets to cover unexpected expenses.
Down payment savings for a house or car.
The purchase of a home or a car involves a significant financial commitment. The benefits of having a savings account include preventing private mortgage insurance (PMI) and a higher interest rate on your loan.
A typical down payment is between 5 and 20%, but this can be as low as 3%. However, PMI must be paid by buyers who put less than 20% down until they have 20% equity in their home.
Savings for retirement.
When you retire, you will no longer receive a regular paycheck. According to a Clever survey, retirees have on average saved $170,726 for retirement. It is also alarming to learn that 37% of retirees no longer have retirement savings, compared to 30% in 2022, and only 12% have enough to meet the recommended retirement savings target of $555,000 per retiree.
It is therefore important to have a savings account to ensure that you will have enough money for retirement.
Saving for a child’s education.
Every year, college costs rise. During the year 2022-2023, tuition and fees averaged $39,400 for private colleges. Thankfully, you can reduce your child’s student loan debt by setting up a savings account to pay for their education.
Education Savings Accounts (ESAs) and 529 Plans (also known as Coverdell accounts) are two types of tax-advantaged college savings plans. Tax-deferred growth is available with both types of accounts. Moreover, the money-including any gains and investment income-can be withdrawn tax-free as long as it is used to finance qualified education expenses, such as tuition, books, supplies, computers, and room and board.
Savings for a vacation or other special purchase.
There is nothing wrong with taking a little vacation every once in a while. You can save without going into debt for a special vacation or other special purchases thanks to a savings account.
In order to build an emergency fund.
Emergency funds can be used to cover unexpected expenses, such as job loss, medical bills, and home repairs. The amount of money you need in your emergency fund should be at least three to six months’ worth of living expenses.
However, according to Bankrate, 57% of U.S. adults are unhappy with how much they have in emergency savings. More troubling? In 13 years of surveying, 22% of Americans do not have any emergency savings.
Achieving financial goals.
Having a savings account can help you achieve your financial goals, whether you are saving for a down payment on a house, retirement, or your child’s education.
To teach children about the importance of saving money.
Spending, saving, and managing money is a valuable lesson your children can learn at a young age.
A U.S. Government Accountability Office study found that low-income families with children enrolled in Children’s Savings Accounts save four times as much money as those without children.
Families may also have higher educational expectations for their children after contributing to a CSA. There is limited evidence that the long-term effects of parents expecting their children to attend college or other higher education are evident, according to a government study.
Compared to checking accounts, higher returns are available.
Most checking accounts do not earn interest and those that do tend to pay very low rates to savers. Most interest-bearing checking accounts earn a lower annual percentage yield (APY) than savings accounts.
These days, it’s not hard to find an account that earns a higher rate than 4% in a high-yield savings account. Typically, online banks offer these types of accounts, since they don’t need to maintain branches and can pass the savings along.
The safest way to store your savings.
You are protected up to $250,000 per depositor, per insured bank, per ownership category when you have a savings account at a bank insured by the Federal Deposit Insurance Corporation (FDIC).
National Credit Union Share Insurance Fund (NCUSIF), a federally backed fund, insures accounts held by members of the National Credit Union Association (NCUA). This insurance is capped at $250,000 per account and owner, just like FDIC insurance.
How to Maximize Your Earnings from a Savings Account
A savings account typically offers a low-interest rate. The good news is there are plenty of ways to get the most out of your savings account:
- Shop around for the best interest rate. The interest rates on savings accounts vary from bank to bank, so compare them before you open one. Online banks and credit unions typically have the best interest rates, so make sure you check them out.
- Open a high-yield savings account. A high-yield savings account pays more interest than a traditional savings account. Savings accounts with high yields are available at online and brick-and-mortar banks.
- Consider a certificate of deposit (CD). Compared to savings accounts, CDs offer higher interest rates, but you have to keep your money in them for a while, usually 3 months to 5 years. Investing in a CD can be a good way to earn more interest if you’re willing to tie up your money.
- Use a money market account. You can get higher interest rates and more flexibility with money market accounts. Money market accounts often let you write checks and use debit cards.
- Keep your balance high. You’ll earn more interest if you have more money in your savings account. To avoid monthly fees, keep your balance at or above the minimum balance.
- Make regular deposits. It doesn’t matter how small your monthly deposit is; it will add up over time. It is also possible to set up automatic monthly transfers from your checking account to your savings account.
Besides the above tips, you may also want to consider:
- Use a savings account bonus. A bank may give new customers a bonus if they open a savings account and maintain a certain balance for a certain period of time.
- Ladder your CDs. When saving a large sum of money, ladder your CDs. Having multiple CDs with different terms allows you to have access to some of your money at any time.
- Avoid early withdrawal penalties. To avoid early withdrawal penalties, carefully read the fine print on CDs before opening. You will likely have to pay a penalty if you withdraw your money before the term is up.
With these tips, you can get the most out of your savings account and reach your financial goals sooner.
How to Open a Savings Account
It is easy to open a savings account since most banks and credit unions offer them. Accounts can be opened online, in person, or by phone.
It’s important to compare interest rates and fees when choosing a savings account. Additionally, make sure the account has the features you need, such as mobile check deposits and online access.
You can start saving money as soon as you open a savings account. Alternatively, you can make automatic deposits from your paycheck. Even if you save just a little, it’s important to save regularly. A little bit goes a long way.
FAQs
What is a savings account?
Savings accounts are types of deposit accounts that help you save money and earn interest. Compared to stocks and bonds, savings accounts typically have lower interest rates, but they also carry less risk. The main reason is that FDIC-insured banks insure individual depositor savings accounts up to $250,000 for each ownership category. In other words, you won’t lose your money if the bank fails.
An emergency fund should also be kept in a savings account since you can easily access it when needed.
What are the different types of savings accounts?
Various types of savings accounts are available, each with its own advantages. There are several types of savings accounts, including:
- Traditional savings accounts. These are the most common savings accounts. Basic features include minimum opening deposits, minimum balance requirements, and monthly maintenance fees.
- High-yield savings accounts. Compared to traditional savings accounts, these accounts offer higher interest rates, but they may have stricter requirements, such as a higher minimum balance or a monthly withdrawal limit.
- Money market accounts. This is a savings account with checking features. Interest rates are usually higher than savings accounts, but minimum balance requirements may be lower and withdrawals may be more flexible.
- Certificate of deposit (CD) accounts. In exchange for higher interest rates, CDs require you to keep your money in the account for a specific period of time, such as six months, one year, or five years. A penalty may apply if you withdraw before the CD matures.
What are the drawbacks of having a savings account?
The following are some drawbacks of savings accounts:
- Low interest rates. The interest rate on savings accounts is usually low. As a result, your money will not grow as much as it would in stocks or bonds.
- Fees. You may have to pay ATM fees or monthly maintenance fees on savings accounts. Before opening an account, compare the fees.
- Withdrawal restrictions. There are withdrawal restrictions on some savings accounts, like a monthly withdrawal limit. Understand withdrawal policies before opening an account.
How do I choose the right savings account for me?
A few factors to consider when choosing a savings account are:
- Interest rate. Choose an account with high interest.
- Fees. Before opening an account, compare fees.
- Withdrawal policies. Check withdrawal policies before opening an account.
- Other features. A savings account can offer additional features, such as ATM access or mobile check deposit. When choosing an account, consider your needs.
How much money do you need to open a savings account?
Opening a savings account doesn’t require a lot of money. The Consumer Finance Protection Bureau notes that opening a checking or savings account takes $25 to $100.
The Balance found that banks and credit unions have the following minimum deposits:
- National banks: Between $25 to $100
- Community and regional banks: Potentially less, often $0 to $50
- Credit unions: Between $1 and $10
- Online-only banks: Often, $0 minimum deposit
Generally, you need to deposit at least $25 to open a savings account.
