Many people strive to achieve financial independence. People who reach the milestone have enough cash flow from their assets to cover their living expenses. Some people view financial independence as a dollar amount, but it all starts somewhere. A savings account can help you embark on the path to financial freedom, and it has many perks to assist you along the way.
Top 10 Benefits of Saving Account You Should Know About
A savings account presents consumers with several benefits. These are the top 10 advantages of opening a savings account and putting money in it.
Interest Earnings
Savings accounts accrue interest that compounds daily, weekly or monthly, depending on the financial institution. Interest represents a risk-free return on your investment that doesn’t experience price fluctuations like stocks.
Your savings can grow over the years as interest builds up, but you should look at multiple banks before committing to a savings account. Some banks offer higher interest rates than others for people who save their money. Since savings tend not to get used for a while, it may make sense to put your money into a Federal Deposit Insurance Corporation (FDIC)-insured bank with the highest interest rates.
Financial Security
Savings accounts are low-risk investments that let you access your money at any time. You don’t have to worry about losing any ground with a savings account, while a stock correction hurts many portfolios. You can have the peace of mind that your money is insured by the FDIC and will remain the same, plus interest payments.
Liquidity
Savings accounts offer high liquidity, making it easy to access the money you have saved. You don’t have to wait a few days as you might for funds from your brokerage account to reach your bank account, and you don’t have to wait several months as you would to sell a real estate property. Stocks and real estate have their respective places in wealth building, but a savings account provides the most reliable liquidity of the bunch.
The liquidity can come in handy if a surprise expense requires immediate attention. Building an emergency fund will allow you to continue addressing monthly budget items without letting a surprise expense disrupt your day-to-day finances. Banks let you access your cash online, at local branches, through ATMs and on mobile apps.
Convenient Access Option
Consumers have several ways to access their money from savings accounts. Nearby ATMs and local branches can help with physical cash, but you can also tap into electronic funds through online banking and mobile apps. These access points are up and running 24/7, giving you plenty of flexibility when you access your funds and make transactions.
Goal Setting
A savings account can be the starting point of financial goals that lead you to a smoother retirement. You can create multiple savings accounts and categorize them based on your goals. You can create one savings account for your down payment and another account for 6 to 12 months of living expenses. Allocating your money into multiple savings accounts can help you stay focused on your goals and build better saving habits.
Financial Discipline
A savings account can lead to financial discipline. It is easier to exhibit discipline when you have an end goal and ways to track your progress. Knowing that each dollar you put into your savings moves you closer to your goals, you may feel less inclined to spend on discretionary items. People with financial discipline monitor their expenses and cut out the ones that are unnecessary.
Some consumers use automatic transfers to make their saving habits seamless. You can automatically transfer a percentage of your monthly income to your savings accounts. Moving money out of your checking account can make you less prone to spending it.
Overdraft Protection
Some savings accounts can protect you from overdrafts you may incur from your checking account. If you overdraw your checking account, this protection lets you move money from your savings account to your checking account. An automatic transfer allows you to avoid an overdraft fee, which can range from $30 to $35 at most banks.
Avoiding overdraft fees can save you hundreds of dollars each month if you overdraw your account too often. You also won’t have to worry about an extra expense that can impact your ability to keep up with your monthly budget.
Teaching Tool
A savings account can teach good financial habits, such as saving money and staying on top of your expenses. These accounts can help people strengthen their financial literacy. Parents can help their children set up savings accounts and pass important lessons onto them through experience. Building good financial habits or teaching your children how to manage money can result in better decisions that result in a better retirement and more. Good money habits can also make down payments and auto loans more manageable.
Separate Financial Bucket
A savings account lets you separate money for everyday expenses from money for long-term goals. You can create an emergency fund and build up for retirement in your savings accounts. On the other hand, a checking account is more suited for keeping up with expenses.
If you lump all of your money into one checking account, it can get difficult to plan for long-term goals. You can also earn higher interest rates if you use a savings account in addition to a checking account.
Compound Interest
Compound interest increases how much you earn from your savings account. The compounding rate varies for each bank, but this example will assume you get a savings account with a 4% interest rate.
If you put $10,000 into this savings account, you will receive $400 and end up with a $10,400 balance. The following year, you don’t receive $400. Instead, you will receive $416. The extra $16 comes from the $400 you earned last year. Each interest payment will increase the following interest payment since you receive interest on more money.
You can exponentially grow your savings with a compounding interest rate and frequent contributions to your account.
Save Up for Your Financial Goals
A savings account makes it easier to build wealth and generate a return on your cash. You can create multiple savings accounts so you can keep track of several financial goals. Setting up a savings account can instill good money habits and help you stay on top of your expenses.
Frequently Asked Questions
Is it good to have a savings account?
A savings account is a good resource for people to earn a risk-free return and categorize their finances.
What is one benefit of a savings account?
A savings account lets you earn risk-free interest on your money while potentially building good money habits.
What are the advantages of a bank savings account?
A bank savings account has several advantages, such as FDIC insurance, compounding interest rates and overdraft protection.
About Marc Guberti
Marc Guberti is a personal finance writer passionate about helping people learn more about money management, investing and finance. He has more than 10 years of writing experience focused on finance and digital marketing. His work has been published in U.S. News & World Report, USA Today, InvestorPlace and other publications.