Why Should I Put Money in a Savings Account?
Why would you put money into a savings account? Learn the importance of a savings account for your personal finances.
January 19, 2022
Many of us are familiar with our checking account — it’s what we use to pay bills, deposit paychecks and withdraw cash. But what about the humble savings account?
You may or may not already have a savings account attached to your bank account. Either way, you could be asking yourself, why would you put money into a savings account? What’s the point, and how do these accounts differ from traditional checking accounts?
What is a savings account?
A savings account is a type of bank account offered by all banks and credit unions.
It’s similar to a checking account, but differs in a few ways:
Savings accounts usually earn interest while many checking accounts don’t
Generally, savings accounts don’t have a debit card or checks linked to them
Savings accounts typically have a limited number of withdrawals allowed each month — a maximum of 6 withdrawals each month is common
What happens when you put money into a savings account? It’s still there for your use. You simply need to take the extra step of transferring it to your checking account in order to actually spend it.
Basically, savings accounts are designed to keep your money for the medium to long term. Checking accounts, on the other hand, are meant primarily for spending and actively managing your money.
Advantages of keeping money in a savings account
There are many benefits to putting some of your funds into a savings account. Here are three ways a savings account can help you with your financial goals.
Savings accounts often earn more interest than checking accounts. While rates are generally quite low right now, you can earn a bit more in a high-yield savings account.
Harder to spend
Your debit card is tied to your checking account rather than your savings. In order to spend money that’s in your savings account, you’ll need to transfer funds into your checking account first. While this is quick to do with online banking, it still takes time — which is actually a good thing if your goal is to spend less money.
Help toward savings goals
A savings account is a good place to save for your emergency fund and mid-term goals, like a wedding or vacation. While investing is important when it comes to planning for your financial future, savings accounts can often serve as the first step in setting some money aside.
Reasons people don’t use savings accounts
Is a savings account worth it for you? Most likely, yes.
Let’s look at some of the common reasons why people don’t use savings accounts. Even if these situations apply to you, it’s worth reconsidering your stance — we’ll explain why.
Scenario #1: “I keep my money in a checking account.”
For many people, a checking account is their primary bank account. And there’s nothing wrong with that.
However, it often makes more sense to keep some money in a separate savings account. There are a few reasons for this:
Many savings accounts pay higher interest rates than checking accounts
Keeping less money in checking can be helpful to avoid overspending
Savings accounts may provide a bit of protection against fraud or a stolen debit card, because most external transactions are processed through checking, not savings
For these reasons, it can be helpful to have both a checking and a savings account.
Scenario #2: “I don’t want more than one account.”
Simplicity certainly has its benefits, so it’s understandable if you don’t want multiple bank accounts.
However, you can typically open a savings account with your existing bank with little to no paperwork. In fact, savings accounts will often be tied to the same online banking account, so you won’t need a separate login or password.
In some cases, opening a savings account could be as easy as calling your existing bank and asking, and it could take as little as five minutes.
Scenario #3: “My money grows more in the stock market.”
Why would you put money into a savings account when you can invest it?
It’s a fair point — historically, the stock market has consistently offered higher returns than savings accounts, at least over long periods of time.
However, invested funds are not necessarily liquid, meaning they aren’t immediately accessible.
While investing for the future is very important, there’s also a benefit to keeping some money accessible in a savings account.
If all your money is tied up in the stock market, you will be forced to sell investments if you have a financial emergency or just need the cash. This can be a problem if the stock market has crashed.
For instance, many people lost their jobs in the financial crisis of 2007 to 2009. Millions were forced to fall back on savings, and the stock market had crashed over 50%. Those who had cash set aside in a savings account were in a better position, since they could keep their investments in the market to wait out the recession.
Similarly, if your money is invested in a retirement account, you generally can’t withdraw it without paying harsh tax penalties until you reach a certain age.
Scenario #4: “I can barely pay my bills — I don’t have any money to save.”
Unfortunately millions of Americans are in this situation. Recent data from the Federal Reserve indicates that around 36% of Americans would have difficulty paying for a $400 emergency without using a credit card or other loan.
This troubling statistic tells us that more than one-third of Americans are living paycheck to paycheck with little opportunity to save money.
If you feel like you’re barely staying above water financially, it can seem pointless to have a savings account. Even so, it can be helpful. A savings account is a good place to stash small amounts of money that may be left over from time to time, or any “bonus” money, such as gifts.
If this extra money goes into checking, it’s likely to be spent. If it’s in a different account, it’s more likely to be saved. And saving even very small amounts of money — $5 here, $10 there — can really add up over time.
Having a savings account can also be useful for budgeting. For example, you can add your paychecks to your savings account, and then move money into checking as you need it or as you budget for each upcoming expense.
Why would you put money into a savings account? Having a savings account offers many benefits and few downsides.
How much money should you keep in your savings account? That’s up to you, but working on building an emergency fund is a great place to start. Financial advisors often recommend setting aside the equivalent of 3 to 6 months of living expenses for unexpected costs.
Beyond that, figuring out how much to keep in savings really depends on your financial goals.
Finally, it’s worth noting that if you have debt, paying it off first may make more financial sense. Debt charges interest, and it will eat away at your financial security over time. This may make it harder to save money in the long run.
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