One of the questions we get in our Financially Fit e-course is whether savings accounts are even worth it. As of this writing, interest rates for savings accounts at traditional banks are hovering around 1.1%. Let’s do the math on this.
If you deposited $100 a month for 1 year, you’d end up with $1,200. If you leave that money alone in your savings account for another year, you’d have an extra $13 and some change. That’s just over a dollar a month – not much!
So, the evidence seems strong to suggest that a savings account is a waste of time. Indeed, if you have any debts (that are more than likely compounding at more than 1.1.%), you should pay those off first. But having a savings account has some value – here are 3 reasons why.
1. It’s a set, defined place for your emergency savings fund.
I like to recommend you having a set place for emergency savings (e.g. quickly accessible cash) that isn’t your checking account, which can easily be tapped via your debit card or linked Paypal account for impulse purchases. Having a set account that you can allocate for a specific purpose is a great way to stay focused on your financial goals. And if your savings is with the same bank as your checking where you receive your income, you can setup an auto-transfer to deposit money into your account each month.
2. Having a savings account can encourage a “save, then buy” habit.
Credit cards can kill your overall net worth. Instead of buying on credit and then paying the price in interest, consider using your savings account as a staging account for your upcoming purchases. The bonus of thinking this way is that by the time you reach your savings goal, you may decide you don’t actually want/need the purchase, and you can then put those funds to use elsewhere in paying down debt or investing in your future.
3. It’s insured by the FDIC. Your mattress isn’t.
While the ol’ cash-under-the-mattress seems cliche, it’s what many of us do. And if you lose that money – or worse, get broken into or your roommate steals it – then that money’s a loss. Even renter’s/homeowners insurance will not be much help. If your cash is in the bank, it’s insured by the FDIC, which means if something happens at the bank, the government will give you back your money.
But, watch for fees.
If your bank is charging you fees for having your savings, then those fees might erode any of those above benefits – and fees don’t help if you have debts you’re trying to work down. Make sure you understand the fees you are charged, and talk to your bank about ways to avoid them. If you can’t find a workable solution, consider setting your savings account up with a locally-owned credit union; they are normally more flexible and have options for local customers to build up savings. An added bonus, many credit unions offer free personal finance classes, so you might want to check out those options too.