Pros and Cons of a Traditional Savings Account
A traditional savings account could help you reach financial goals, though there are a few things you need to consider.
Contributing Writer at Tally
November 1, 2021
Forty-five percent of Americans don’t have any money in a savings account, according to a recent survey. Having cash stashed away in a savings account can be particularly useful as an emergency fund or if you’re working toward a particular financial goal.
There are a few different types of savings accounts available. A traditional savings account is perhaps the most common type of savings account and is what you likely think of when you hear the words "savings account." In this article, we’ll discuss traditional savings accounts.
Specifically, we’ll cover:
What a traditional savings account is and what to look for when opening one
The pros and cons associated with this type of account
An overview of how a traditional savings account compares to other bank accounts
By the end of this article, you should have a much better understanding of whether a traditional savings account is best for your financial situation.
What is a traditional savings account?
A traditional savings account is the most basic type of savings account. It’s similar to a checking account, with the primary difference being that you won't often spend from your savings account.
You can use a checking account to:
Make cash withdrawals
Pay with a linked debit card
Pay credit card debt or other loans
While you may technically be able to do some of these things with a traditional savings account, the point is to avoid those things. Instead, your savings account gives you somewhere to park cash for longer-term storage. You can use your traditional savings account to put money away as a rainy day or emergency fund. You can also use it to save specifically for a long-term goal, like having cash for the down payment on a home.
Many financial institutions will offer to open a traditional savings account when you open a checking account.
What should you look for when opening a traditional savings account?
A regular savings account should offer a safe place for you to store money. However, not every savings account is the same. Below are some of the things to look for when opening a new account:
Whether the account is FDIC- or NCUA-insured. Since you’ll be putting money into your savings account, it’s considered a deposit account. As such, you’re eligible for insurance from the Federal Deposit Insurance Corporation if your financial institution is FDIC-insured. If you put your money in a credit union, it should be insured by the National Credit Union Administration. In both instances, your accounts are guaranteed up to $250,000 per financial institution, which protects you in case your institution closes. You don’t need to do anything special to enroll.
Minimum balance requirements. Some institutions may have a minimum opening deposit requirement when establishing the account or require you to maintain a minimum account balance as long as the account is open. You won't be able to open the account if your initial deposit is too low, and you may be charged penalty fees if you fall below the minimum required balance.
Any fees associated with the account. Make sure you read the fine print to find out if there are any fees associated with the account. Examples would include monthly maintenance fees, overdraft fees or withdrawal fees.
Whether there’s a mobile banking option. Both traditional banks and online banks have mobile banking options. Mobile apps provide easy access and allow you to quickly transfer funds without having to visit a brick-and-mortar bank.
What are the pros and cons associated with traditional savings accounts?
There are a lot of benefits that come with a traditional savings account, but there are also some drawbacks. Below is a breakdown of the pros and cons.
Pros of traditional savings accounts
One advantage of a traditional savings account is they provide easy access and high liquidity. If you need your money quickly you can easily transfer funds into your checking account.
This is different from other options, like a certificate of deposit or an individual retirement account (IRA). Both have early withdrawal penalties if you move the money too soon. This isn’t the case with traditional savings accounts, as long as you maintain your required minimum balance.
Furthermore, your money isn’t subject to market fluctuations. This is different from an investment account, in which you could see your balance go up and down depending on the status of the stock market.
Lastly, there are no limits as to how much you can deposit annually. IRAs, for instance, have annual deposit limits. But there’s no limit to how much cash you can store in traditional savings accounts.
The best savings accounts may allow you to establish "buckets" to distribute your money instead of having to open multiple accounts. You can set up buckets for each one of your savings goals.
For example, you can create a bucket for "emergencies" and a bucket for a "new car." Though they’re technically a part of the same account, and you can move money freely between the two, they can help you easily manage your finances and your goals.
Cons of traditional savings accounts
Traditional savings accounts can be useful, especially if you’re just getting started on your financial journey. However, there are some downsides to consider.
First and foremost, your savings rate will likely be low, limiting your compounding interest earnings. Traditional savings accounts typically have low interest rates and annual percentage yields (APYs), especially when compared to high-interest or high-yield accounts.
Another downside to a traditional savings account is you don't receive any tax benefits. This is different than a Roth IRA, in which your deposits grow tax-free.
How does a traditional savings account compare to other options?
To fully understand traditional savings accounts, it's important to compare them to other options.
Below are four types of savings accounts you may consider.
High-yield savings accounts
High-yield savings accounts are very similar to traditional accounts, except they have a higher interest rate. Online savings accounts like Ally have grown in popularity and can offer higher interest rates than traditional brick-and-mortar institutions because they don't have to worry about things like brick-and-mortar rent or overhead.
Though you can use direct deposit or transfer funds with these accounts, you may have trouble depositing cash because the bank doesn’t have physical ATMs. Ally, for instance, allows you to withdraw cash from partner ATMs, but you can’t deposit cash. Additionally, the interest rate on your account will fluctuate alongside the Federal Reserve Rate.
Money market account
A money market account is a hybrid between a savings account and a checking account. You can often write checks from them and access your funds using a debit card or ATM. Money market accounts typically have higher interest rates than traditional savings accounts, though you may need to have a substantial account balance to access these rates.
Certificates of deposit accounts
Certificates of deposit, also known as CDs, are time-based deposits. Your money is guaranteed to grow at a certain interest rate with CDs, though you can't access the funds until maturity. This means your money is locked away for a predefined period. You'll likely have higher interest rates, but your money is far less accessible than it is with a traditional savings account.
Alternative or specialty accounts
There are other types of savings accounts available. These can include IRAs, 529 college savings accounts or health savings accounts. While there is a high potential for earnings, your funds aren’t very liquid. These are good options for specific goals, like your child's college tuition or retirement.
Use a traditional account to reach your savings goals
Traditional savings accounts are simple vehicles that can be advantageous because of their simplicity and ease of access. However, there are some other things to consider. Your account may be subject to monthly fees or minimum account balances. You may also find that high-yield savings accounts have higher interest rates.
You may want to consider using a traditional savings account for your rainy day or emergency fund. When it comes time to use these funds, you'll likely need access to the cash quickly. That’s where traditional savings accounts shine. You can put away funds for your other financial goals into more long-term options, like an IRA.
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