The Advantages of Having a Savings Account
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Putting your money in one place, such as a checking account, might seem like the simplest way to manage your cash. However, allocating some of that money to a savings account can help you save some money and make your money work for you by earning interest.
A savings account provides an effortless way to set aside money for unexpected emergencies or future goals, like a vacation or a significant purchase. Additionally, it offers a more secure method of saving compared to keeping cash at home.
Let's explore the advantages of a savings account.
1. Opening a savings account may not require a substantial amount of money.The process of opening a savings account is generally straightforward. Depending on the bank, you may only need as little as $25 to $100 to get started. In some cases, you may not need any money at all.
You can set up a savings account either in person or online, depending on the bank's options.
Setting up an account in personOnce you have chosen a bank or credit union, visit your local branch.
You'll be asked to complete an application for a savings account. Usually, you'll need to provide two forms of identification (including a government-issued ID), your current address, birthdate, and contact information, along with the minimum opening balance, if required by the bank. After reviewing and verifying your information, the bank will inform you if your account is approved.
Setting up an account onlineIf you prefer the convenience of opening a savings account from the comfort of your home, you're in luck. Some banks and credit unions offer online applications for their savings accounts.
Visit the financial institution's website and navigate to the savings account section to find the application link. To complete the online application, you'll need to have the same information ready as if you were opening an account in person. After submitting your application, the bank will confirm your details and inform you about the status of your application.
Does opening a savings account affect my credit score?The simple answer is no. Your credit score is influenced by various factors, such as payment history, credit utilization ratio, length of credit history, credit mix, and recent credit activity.
While opening a savings account does not impact your credit score, some lenders might inquire about your income and assets, including savings accounts, when making lending decisions. Therefore, having money saved up can be beneficial if you plan to apply for a loan in the future.
2. A savings account enables automatic saving.Let's face it—finding extra funds to save is not always easy. Setting up automatic deposits into your savings account can contribute to building up your savings effortlessly.
You can opt to have a portion of each paycheck directly deposited into your savings account or establish regular automatic transfers from your checking account to your savings account.
If you are married or in a domestic partnership, a joint savings account can facilitate mutual financial goals by allowing both of you to deposit money automatically into the account.
3. Your money is easily accessible.Certain savings options, like certificates of deposit (CDs), may restrict access to your funds without incurring a penalty before the account's maturity date. However, with a savings account, you generally have easier access to your funds. Additionally, you may be able to transfer the funds to your checking account for writing checks or using your debit card.
A savings account's accessibility can render it an excellent choice for an emergency fund - a place where you can store funds while still having the ability to access them in times of need.
It is important to keep in mind that federal regulations may impose restrictions on the number of transfers or withdrawals allowed from a savings account within a specific timeframe, depending on the method and purpose of the withdrawal.
4. You have the opportunity to earn interest on your savingsYou may have encountered the adage "saving a penny is earning a penny." This saying holds true when it comes to savings accounts because your money has the potential to generate more money.
As of February 2023, certain savings accounts known as high-yield savings accounts offer an annual percentage yield (APY) ranging from 3.3% to 3.5%. For example, the Credit Karma Money™ Save account provides an APY of 3.5% as of February 2023.
Typically, money in a savings account grows through the phenomenon of compound interest. Compound interest allows you to earn interest not only on the money you deposit but also on the interest you have already accrued. The frequency of compounding interest, whether daily, monthly, quarterly, or annually, depends on your bank. A higher APY results in greater returns on your savings.
Although it may not appear significant initially, over time you may notice a substantial increase in your savings.
5. Your savings enjoy protectionIf you prefer keeping your savings in a piggy bank, it is vital to consider that your money cannot be recovered if it is stolen or destroyed in a flood or fire.
However, if your money is deposited in any type of account, including a savings account, at an institution insured by the Federal Deposit Insurance Corporation (FDIC), it is safeguarded by the U.S. government. FDIC insurance covers both the deposited money and any interest earned, up to $250,000. Moreover, this coverage applies on a per-account, per-bank basis, allowing you to extend your protection.
Consequently, even if an FDIC-insured institution faces closure, your savings remain secure within the $250,000 limit.
What comes next?If you are uncertain whether a savings account is the most suitable savings tool to achieve your goals, it would be beneficial to familiarize yourself with the differences between savings accounts and other savings vehicles such as certificates of deposit and money market accounts.
However, if you have determined that opening a savings account aligns with your financial objectives, it is important to dedicate some time to research and compare various account terms and APYs. This will assist you in finding the most suitable account that caters to your specific needs. Additionally, reading the fine print and understanding any monthly fees, minimum balance requirements, or other associated terms is crucial.
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