Why are Savings Accounts Valuable?
Savings accounts help us to plan for future needs and set up an emergency monetary fund for unexpected expenditures. However, effectively managing a savings account is easier said than done. Learning to manage a healthy savings account can take months, or even years to perfect, as the process requires a great deal of discipline.
Read on to discover the main benefits of having a savings account and to find out how to effectively manage one of your own.
The Benefits of a Saving Account
Here are 3 of the main benefits of saving accounts:
1. You Can Earn Interest
The best advantage for having a savings account is the ability to earn interest on the money you’ve placed into it. When you put money into a savings account, your bank will use that money to make loans to other customers, or to invest in various financial endeavors, like stocks and bonds, paying you interest for allowing them to have short-term access to your funds. Current savings account interest rates vary between a 1-3% annually, which isn’t huge, but is far better than leaving funds stagnating in a checking account.
2. You Can Save For Major Expenditures
A savings account allows you to save your money in a secure and safe place, especially if your account is FDIC insured (which means that even if the bank loses all its money, the Federal Government will pay you whatever you had stored there). Savings accounts provide a great opportunity to gradually build up funds for major expenditures, such as for the down payment on a home mortgage or for buying a new car. Gone are the days when people had to stuff money under their mattress, as savings accounts provide a secure and reliable place to store your funds.
3. You Can Build an Emergency Fund
Life has a habit of creating unexpected surprises, many of which can be costly. To prevent yourself from having to scramble when you need emergency money, you should consider building up a savings account to serve as your rainy day fund. Ideally, you should save several months worth of living expenses in your savings account to be used in the case of an unexpected emergency such as car troubles, job loss or medical emergencies. Having an emergency fund can lift a huge weight off of your shoulders, providing you with peace of mind that is valuable even if you never find yourself in a financial emergency again.
5 Tips for Successfully Managing a Savings Account
Once you’ve decided to establish a savings account, make sure to manage it well by continuing to add funds to it for future purchases or emergencies, and to create a larger return on your investment via aggregated interest. Follow these 5 tips for getting the most out of your savings account:
1. Use a Separate Bank for Your Savings
It’s definitely convenient to have a savings and a checking account under the same bank, especially if you use online banking. However, it can be all too tempting to constantly pull money from your savings to your checking account, which can easily lead to your entire savings being depleted with one simple transfer.
To avoid this issue, it’s a good idea to use a completely separate bank for your savings account. This way you can still add money to it, but the temptation to spend it by transferring it over to your checking account will be reduced. Opening a new bank account is often very simple and can be completed either by visiting a bank branch in person or by applying for an account online.
2. Secure a High Interest Rate
A huge perk of having a savings account is earned interest, so make sure get or switch to an account that offers the highest interest rate available. Since the economic crash, interest rates have dropped enormously and are now averaging less than 1%, but this doesn’t mean that you can’t still get a good deal.
Take some time to shop around different banks to find the savings account with the best interest rate. Keep in mind that online banks often offer much higher interest rates because they have far lower overhead costs, but remember that there are more security issues with choosing an online bank as your provider.
3. Add a Set Minimum Amount Each Month
Adding a large amount of money to your savings account one month, then sporadically from there on out rarely works, so try to add a set minimum amount each month. Contributing a set minimum amount to your savings each month will allow you to save gradually and responsibly. In little to no time you’ll find yourself sitting on top of a mountain of cash that you can use for big purchases, or to retain for use in emergency situations.
Traditionally, financial advisors have suggested that 10% of your monthly pay check should go into your savings, which is an ideal minimum to start off with. However, if you can afford to add more, by all means increase your monthly amount. You can easily set up a transfer of funds to your savings by visiting your bank in person or by configuring monthly deposits online. Setting up automatic monthly deposits is a sure-fire way to prepare yourself for future financial emergencies.
4. Don’t Withdraw Money for Non-Emergency Items
Unless you want the money for something that’s absolutely necessary, or for an emergency, try to avoid withdrawing money from your savings account. Some savings accounts will even penalize you for making big withdrawals, and slap your account with major fines, though that is certainly the exception to the rule. Keep in mind that treating a savings account as a checking account ultimately defeats the purpose of having one in the first place, so try to avoid removing money from your savings account unless you really need it.
Even when you do make big withdrawals in order to cover a new car or an emergency, try (if possible) to leave some savings in your account so that you can avoid any potential penalties and so you’ll continue to earn interest on what you’ve already deposited into the account. Remember that savings accounts are supposed to be used for emergency needs, and do your best to treat it that way so that you’ll have funds in place when disaster strikes.
5. Set Savings Goals
Savings can feel like less of a burden and become more enjoyable when you set savings goals for yourself to reach. Perhaps your goal is to put down a deposit for a house or to buy a new laptop, but whatever it is, one of the safest and most reliable ways to save for these big expenditures is through creating a efficiently maintaining a savings account.
Once you’ve established your goal, remember that each time you send money to your savings account you’ll be one more step closer to achieving it! This way you’ll likely feel much more positive about your savings and enjoy watching it gradually grow. It’s a great feeling paying for something that you’ve saved for, so keep your goals in mind as you distribute money to this account.
Creating an Account
Now that you’ve read over the many benefits of having a savings account and found out how to manage it effectively, the next step is to actually create your account. Remember to shop around to secure the highest interest rate possible. Look at both traditional banks and online providers, but make sure that wherever you put your money is FDIC insured in case disaster strikes. Save responsibly, consistently, and you’ll soon see your account reach a respectable sum of money.
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