The purpose of a savings account is to put part of our hard-earned money into savings to meet possible contingencies like medical emergencies, education, and vacation. Opening a savings account during financial instability could be a well-informed decision to earn guaranteed interest.
There are various advantages and disadvantages of a savings account. The benefits are; It is easy to open, ensures investment interest, and your principal amount is secure throughout the deposit tenure, whereas cons could be; minimum balance requirements, lower interest rates vis-a-vis other investments, and federal limits on withdrawals.
Almost anyone can open savings accounts, from children to teenagers to adults, to put aside money for the future and create wealth. It is a better option to keep emergency cash for unexpected life events. However, many people ignore opening a savings account due to a lower interest rate compared to other long-term investments.
Before you decide for yourself, read the underlying pros and cons of opening a savings account.
Advantages of a savings account
- Access and availability
Opening a savings account is easy as almost anyone can open it and withdraw money any time at ATMs (the withdrawal limit is subject to federal limits). You have 24/7 online access to your account, and you can link your savings account with your checking account to avoid costly overdraw fees. Doing so will help you quickly transfer funds from one account to another.
- Interest rate
Online savings accounts offer higher interest rates because there are fewer overhead costs on the bank’s part. Therefore, the savings are passed along to customers. Besides higher interest on savings accounts, there are low or no bank fees applied as well.
- Flexible fund transfer
Most banks allow their savings accounts’ customers to transfer money to their savings accounts from other bank accounts, whether it is an online bank or a brick and mortar. You can even schedule your fund transfers.
- Mobile banking
Banks also offer mobile or net banking services on mobile banking apps. With your login details provided by the bank, you can deposit checks, review your balance, and keep track of all the transfers.
- No lock-in period
Another benefit of having a savings account is that you are not locked in for any period. You have the freedom to switch your savings accounts as often as you like.
Disadvantages of a savings account
- Cash deposit
Although depositing a check into your savings account is easy and can be done with just a few taps, the challenge lies in a cash deposit for which you will have to find an ATM that accepts cash deposits. Deposit machines are generally available inside the bank branches.
- Withdrawal limit
As per regulations, savings accounts have federal limits when withdrawing funds. It is usually five times per month. If you exceed the withdrawal limit set by the bank, the bank will charge a certain fee. Your savings account can be changed to a checking account if you cross the withdrawal limit.
- Interest rates can change
Interest rates are subject to change. Banks are within their rights to set and change interest rates as they wish. However, high-interest savings account rates are always in line with the movements of the federal rate.
Interest rates on savings accounts are also subject to inflation. For instance, if your savings account is not paying a competitive interest rate then chances are that the value of interest earned is affected by inflation.
- The temptation to spend more
Another disadvantage of having a savings account is that you have access to your money whenever you want, which means that you could dip into your savings anytime and sabotage the prospect of earning a higher interest rate.
A savings account is the best choice to keep part of your income as your emergency fund. You also have the option to increase wealth by earning guaranteed interest.