If you have decided to start saving money, you might have heard about the importance of having a savings account.
Now, many people who are new to the concept of having a savings account might wonder about the pros and cons of having one. They might also wonder whether a savings account is only for old people who will want to use the money for their golden days – or- whether it can be a fruitful addition to anyone’s financial plan.
The thing about having a savings account is that this account offers you a highly liquid asset that pays an above-average interest rate. This way, having a savings account is much better than the potential benefits that you might get with a standard checking account.
Additionally, a savings account provides you the much-needed separation of your finances from a checking account to a savings account and to an investment account. The different accounts provide you with much-needed help to plan for a better future.
Nonetheless, sometimes savings accounts come with an additional fee, and they might not be your best alternative for investing or saving money in the long run. You might want to take a closer look and see the best options for the best high-yield savings accounts.
If you are looking for an efficient tool to help you manage your money more efficiently, then opting for a savings account could be your best option. Let us have a look at some of the essential benefits of having a savings account.
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Higher Interest Rate
The primary benefit of having a savings account is that this account type offers you a higher interest rate than a checking account.
A checking account usually pays you an interest rate of 0%, which is nothing at all. On the other hand, a savings account at a local credit union or a local bank will pay you an interest rate, the percentage of which can range from 0.25% to 0.50% interest on your money.
Now, initially, this doesn’t seem like a lot – and it really isn’t – but you would rather have 0.25% over 0% any day of the week. Just think about it – no matter how small, this percentage is still free money. The bank can pay you that interest rate on your savings account because they loan that money out.
Nonetheless, this doesn’t mean that you should be going to your band and saying that you want to get all your money withdrawn. While the bank can absolutely do that – if you were to request it – but they will be paying you interest mainly to use your money for other loans.
So, the primary advantage of having a savings account is that it has a higher interest rate than a checking account.
Risk-Free Return
Suppose you are investing in the stock market; the risk of that investment value going down is always high. The interest rate that people always talk about (7%) will not happen every year. But – if you put your money in a savings account that pays you up to 2%, as some of the high-yield savings accounts do, it is definitely a risk-free return.
Now if you think about it – having a savings account is a good deal to do, even with short-term investing.
Effective Way of Separating Your Finances
If you are struggling with saving money and are guilty of overspending money, you will immensely benefit from having a savings account, as it will help you separate your finances. When it comes to benefitting from a savings account, it will work in terms of “out of sight, out of mind.”
When you get your paycheck and see that you have money in your checking account, your mind will keep telling you a hundred ways that you need to be spending that money. Now here is what you will want to do to resist the urge to overspend your money – you will want to opt for setting up automatic withdrawals from your checking to your savings account.
This way, a pre-set amount of money moves automatically out of sight and out of your mind. Now if you look at it, a savings account offers you the best form of separation of your finances.
And to make saving money a game of motivation, you can nickname your savings account based on the goal, such as a holiday travel savings account. Your savings account will build up over weeks and months, and over time, you will have a nice lump sum that you can use to travel and reach your other goals without having to stress about how you will pay for your goals.
Believe us when we tell you that using a savings account as a way to separate your finances will be one of your favorite bright sides of having a savings account in the first place.
Why Use a Savings Account
Now that we have established the essential benefits of having a savings account let us talk about why you should have a savings account. You should be using your savings account at minimum to sort your emergency fund of 12 months to 24 months of cash.
Now this means that if you suddenly lose your job and have no more income coming in, you can continue living off that emergency fund until you find a new job. And the recent pandemic has taught us about the uncertainty of life, which is why you need to have that reserve there to help you through sudden emergencies and tough times.
The savings account will help you eliminate so much stress by planning ahead right now. Only you can determine the amount that you will want to have in your savings account – but – you will want to aim at collecting a minimum of 12 months’ expenses.
Remember – the key is to start saving with a small goal, such as saving $500 in the first month, then you could up it to $1000 the next month. Dedication and discipline are key to achieving any goal in life, and the same goes for your financial goals.
