When to open savings accounts

When to open savings accounts

If you have extra money lying around after you get your bills paid, what do you do with it? One common option to consider is a savings account. A savings account is a long-term, fundamental money management tool that can help you meet numerous financial needs. It also means you are placing your money somewhere that is not under your absolute control, since it is being held by a bank, according to vittana.org.

Is this money management tool right for your financial needs? By examining the advantages and disadvantages of a savings account, you will be able to make the appropriate decision for your financial health.

Here are the advantages of a savings account

*Savings accounts will usually accrue interest over time

Although interest rates have been extremely low, you will still accrue interest over time with an account. That means you have more earning potential with your money compared to keeping it in a safe at home.

*Your funds are still readily available

With most banks, you have online access to your funds 24 hours per day. All you need to have is a data connection or access to the Internet. Many institutions will allow you to link your savings account to other accounts you may have, like a current account, which can help you to avoid costly overdraw fees. This also allows you to quickly transfer funds from one account to another, even outside of regular banking hours.

*Your money is kept safe

Because your money is being held by a third-party, it increases your personal safety. Not only does storing cash on your property make you a target for a potential robbery, but losses like that are not always covered by a homeowner’s or renter’s insurance policy. If there was a fire in your home or some other natural disaster, you could lose your cash as well. Keeping your cash in a savings account keeps you and your money safer.

*You can open an account with very little money

Many savings accounts can be started with low amount. Some institutions may have an even lower limit, sometimes allowing an account to be opened for very little amount. This gives you an opportunity to begin saving your money, even if you don’t have much to save at the start.

*Savings accounts can provide automated bill payments

Many financial institutions allow bills to be paid automatically out of a savings account without being subjected to the withdrawal and transfer laws. This allows you to save time because you don’t need to manually pay every bill each month and you are less likely to experience late fees because you missed or forgot a payment. Of course, you would need to have money in the account to pay the bill, but if you do, you would be able to maintain a better credit score over time.

*You receive security

A savings account gives you the opportunity to put away cash in case you have an emergency situation. If you lose your job, for example, you would be able to draw upon your savings account for your monthly expenses. Or if your water heater goes out, you could tap into your savings to purchase a new one. Think of a savings account as a small insurance policy that can help you maintain your current standard of living if something unfortunate occurs.

Disadvantages of a savings account

*Interest is often compounded monthly, or even annually, by most financial institutions

There are online banks that will compound your interest on a daily basis, but most traditional banks will only compound your interest monthly. This means the full potential of your money is not always realised, especially when compared to other investment opportunities.

*Easy access to money means more temptations to spend it

It is a lot easier to spend your money when you have high levels of accessibility to it. For this reason, many choose to use other savings products, such as a fixed deposit, to avoid the temptation of spending it. Fixed deposits are a good option because they offer a higher interest rate, but you also lose immediate access to your money unless you are willing to pay an early withdrawal penalty.

The advantages and disadvantages of a savings account involve cash access, long-term capitalisation, and safety. Consider each key point and you would be able to determine if starting a savings account or continuing to maintain the one you have is the right decision for you.

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