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With interest rates falling to historic lows, many are asking, is a savings account worth it? Today, I’m tackling that question. While savers aren’t happy about the interest rates they’re earning in their savings accounts, there’s more to the story than just interest rates. I will show you five reasons you still need a savings account and some possible alternatives that offer similar features as a savings account with higher interest rates. Let’s get started!
Benefits of a Savings Account
Why have a savings account? That’s a key question I hope to answer today to help you understand their value despite low-interest rates.
1) Liquidity + Easy Access to Funds
I am the first person to admit that I invest aggressively. I do not keep large cash reserves on hand (beyond an emergency fund, a few sinking funds, etc.).
So, if you invest most of your money, why have a savings account? Because savings accounts provide liquidity – you can access funds with just a day or two of lead time.
This liquidity / easy access to funds is essential when you need money quickly, such as for an unexpected expense.
2) Savings Accounts are Safe
Let’s say you swear off savings accounts. What are your alternatives?
Maybe you stick the money under your mattress? What if your house burns down?
Or perhaps you’ll put that money in the stock market. While you may earn a return in the long run, what happens if you need to access funds precisely when the stock market takes a dip? You’re hosed.
Savings accounts are safe. Your money is there when you need it, and it’s protected by FDIC insurance (or the NCUA in the case of credit unions), up to $250,000.
The bottom line is that your money is available when you need it, and you can rest easy knowing it won’t decline in value.
3) Earn Some Interest
Okay, so savings accounts don’t provide the interest that they used to. But how much interest is your checking account making you? I’m guessing not much.
Here’s the problem. Over the last decade, inflation has hovered between 1.5% – 2.5% on average, according to the Bureau of Labor Statistics (as measured by the consumer price index).
When you stick your money in a checking account, your real return is negative. Said differently, if your money is earning less than the rate of inflation, your dollars are becoming less valuable over time.
While savings accounts may not make you money on an inflation-adjusted basis, they’re better than the alternative, which is near nothing. You’re better off trying to offset at least some of inflation’s impacts.
4) Savings Accounts Make it Easy to Track Goals
I am a big proponent of using savings accounts to track your money goals.
For example, if you want to create an emergency fund, one straightforward way to do so is to open a savings account dedicated to tracking your emergency fund.
Using a dedicated account helps earmark money as “off-limits” and shows you how close you are to reaching your goal.
You can also set up dedicated savings accounts to track other money goals like taking a special vacation or buying a new car.
5) Savings Accounts Make it Harder to Spend Money
Finally, one of the best features of savings accounts is that they make it harder to spend money.
Let’s say you want to spend $1,000 on a new laptop. If you know you’ll need to move money from your savings account to your checking account, you may be inclined to think twice before making the purchase.
Separating saving money from spending money can make it easier to stay on track with your money goals.
Plus, when you automate your savings by setting automatic transfers from your checking to savings account money, you’ve helped create a forced savings plan for yourself.
As I hope you can now see, savings accounts are not pointless – they have a lot of value beyond earning interest.That said, they’re not perfect. When considering whether a savings account is worth it, you’ll also want to consider the downsides.
Disadvantages of a Savings Account
Now that you know all the reasons a savings account is worth it let’s cover some reasons why it might not be the best place for your money.
1) Low Interest
Yes, the number one disadvantage of savings accounts is that they offer very little interest in today’s low-interest-rate environment.
As explained above, this means you are losing money to inflation. You’ll need to continue adding to your savings account to keep the spending power of your bank account from declining.
So, perhaps you’re considering vehicles that earn higher rates of return. Here’s the rub, though. Investments that earn higher rates of return – returns in excess of inflation – carry more risk. And frankly, it’s critical to maintain a cash cushion, even if it’s at the expense of losing spending power to inflation. Keeping cash on hand reduces risk.
Because of the interest rates on savings accounts, it’s important to understand what they’re good for and what they’re not. As mentioned, savings accounts are an excellent place for emergency funds and sinking funds. But they’re not a place to grow wealth. You will not build wealth if you only use a savings account – to do that, you must invest.
I like to think about where to put my money by using time as a yardstick. For any funds you may need in the next few years (e.g., an emergency fund, short-term savings goals, etc.), your money belongs in a savings account. For longer-term financial goals, then it’s okay to consider investing instead.
2) Limited Withdrawals
Historically, there was a rule in place called Regulation D, which limited the number of withdrawals from savings accounts to six transactions per month.
While that regulation has now been relaxed, many banks have held the restrictions in place.
Because of this, you cannot use your savings account as a checking account – expect to be limited on the number of transactions you can complete each month.
While this can be viewed as a negative, it can also help keep you from spending money in your savings account – and that’s a good thing.
Finally, not all savings accounts are free. Some still carry fees.
For example, some banks still charge a monthly account maintenance fee or have minimum balance requirements.
Avoid these accounts like the plague – you should not be paying any sort of ongoing fees for a savings account.
My Favorite Savings Accounts
Okay, so, hopefully, now you understand why savings accounts can be so valuable. If you’re still asking yourself, “should I open a savings account,” the answer is yes.
Below are two of my favorite savings account options:
1. CIT Bank
CIT Bank is one of the best banks available right now for saving. I prefer their money market account to their savings account, as it has slightly better features. It consistently offers one of the best interest rates around. All you need is $100 to get started! Check out the CIT Money Market account today.
2. Ally Bank
I have been banking with Ally for several years, and they provide one of my favorite savings accounts. Their interest rates have always proven competitive, and their mobile app is slick and easy to use. And I’ve never had an issue reaching support when I’ve run into trouble.
Alternatives to a Savings Account
Wondering what is better than a savings account? Depending on how you plan to manage your money, there are a couple of other options to consider.
First, you may be able to earn a slightly better rate on your savings by opening up a certificate of deposit. The downside here is that you’re committing your money for a set period. If you need to redeem your cash in advance of that, you’ll typically face some sort of penalty. Given how small the spread is between interest rates on traditional savings accounts and CDs currently, I keep most of my savings in a conventional savings account. Still, I also put a small amount into CDs.
Another option is to use a Series I Savings Bond. What in the world is a Series I Saving Bond? It’s a U.S. government bond, but it comes with a twist. It pays a fixed rate of interest plus a variable rate of interest. The fixed rate of interest is relatively low, but the variable rate is where things start to get interesting. The variable rate on the Series I Savings Bond aligns with the rate of inflation.
Let me say this differently. The Series I Bond will return at least the rate of inflation in interest payments. So, you’re putting your money into a risk-free investment product (because Uncle Sam backs it), and the spending power of your investment will never decrease (because it will track the rate of inflation).
The Series I Bond does have some limitations (e.g., you can’t invest more than $10,000 per year, you cannot withdraw money for a year, you pay an interest penalty if you redeem the bond before holding it for five years, etc.). However, I believe the Series I Bond is the best-kept secret in all of personal finance.
I use the Series I bond for most of my emergency fund, keeping just a small amount in cash. This is how I keep my money from losing value while gaining nearly all of the benefits of a traditional savings account. You can learn more about Series I Bonds by visiting the U.S. Treasury website.
Is a Savings Account Worth It: A Summary
Is a savings account worth it? In my opinion, every person on the planet should have a savings account, regardless of interest rates. It serves a particular purpose in your financial strategy.
Think of it this way. There are two parts of a personal finance strategy: offense and defense. Using a savings account is about playing defense with your money by putting it in a safe, liquid account.
Savings accounts aren’t for money you’re investing for a longer-term horizon, but they will keep your money safe for near-term needs.
While interest rates are quite low currently, they will rise again, and when they do, you’ll be better positioned by having a savings account in place. So, open a savings account today and start playing smarter defense with your money!