If you have a checking account and spend less than you earn, you’re already doing pretty well. But you could be doing better with a savings account. A savings account is a dedicated place to store long-term savings—emergency funds or money earmarked for certain goals.
Because a savings account pays interest, it’s almost always smarter to keep your long-term savings there than in a checking account. By shopping around, you can find a better interest rate and more favorable policies.
How Do They Work?
Savings accounts pay interest, but unlike investments, you have no chance of losing your money. Your deposits are insured by the FDIC for up to $250,000 per account. However, those rates will be lower than investment rates—averaging .05% annually. Savings accounts paying even 1% interest are rare.
Unlike checking accounts, you can’t access your money all the time. Most savings accounts limit you to six withdrawals a month, not counting withdrawals through a bank teller or ATM. That limit can actually help you because constantly taking money out of savings will hurt your goals. Because of the coronavirus pandemic, though, some banks have relaxed that limit.
How to Use Your Savings Account
A savings account can help you keep a boundary between spending money and money you want to save. It’s a good place to keep your emergency fund or the money you’re saving for a down payment, vacation, or car. For that strategy to work, though, you can’t let yourself take out money for other purposes.
Decide on a monthly percentage to save and stick to it. You can even have your employer direct deposit a certain amount of each paycheck there. But make sure you can afford your bills on the remainder. If you always have to take money back out of your account because you can’t afford to pay your bills, you’re depositing too much into savings.
How to Choose a Savings Account
Every bank offers savings accounts, but they aren’t all the same. The first priority, of course, is a high interest rate. Online-only banks usually have the highest rates. But these rates can change at any time. Are you willing or able to keep track of interest rates and change your bank account to chase a higher one? Or do you want one with a stable rate so you don’t have to keep track?
Of course, that’s not the only consideration. Some banks have minimum balance requirements. Banks may also charge fees when your balance is too low. If you’re saving small amounts, you should avoid those options. You may also want the convenience of a bank with a local branch, or one where you also have a checking account so you can transfer money easily between the two.
Help With Your Savings Account
If all this is a lot to digest, a financial advisor can help you. They can point you to a savings account that fits your needs, and give you advice on how to manage the money you save. Contact us for help with your savings today!