The Pros and Cons of a Traditional Savings Account

Source: iStock

Source: iStock

The savings account has been a long-standing financial tradition, both for families and individuals. Here’s the idea: You deposit some money with a bank, often times you agree to keep a minimum amount of money in the account, and over time you earn interest on the deposit. It sounds like a pretty sweet deal, but unfortunately savings accounts aren’t what they once were, and now many people are choosing not to use them at all.

So does a savings still have a place in your financial planning? Here’s a look at the pros and cons.

Benefits of a savings account

Traditional savings accounts are easy to open. Typically it takes just a few minutes and can be done in person at a bank, over the phone, or even online. Often if you open a savings account alongside your checking account, you can save money on bank fees, but this benefit varies bank to bank. Most savings accounts require you to keep a minimum amount of money deposited, and some place restrictions on how much money can be withdrawn and how quickly.

The Federal Deposit Insurance Corporation, or FDIC, insures all savings accounts for up to $250,000, making them one of safest places you can store your money. This insurance means that even if your bank completely fails, you will not have to worry about losing your money, assuming there is $250,000 or less in the account.

The biggest benefit of this type of savings account is that the money is safe, that it is earning interest (however modest), and can be accessed relatively quickly. This makes a savings account the perfect place to store your emergency savings so you can quickly access them in the event of any type of urgent financial situation.

The drawbacks of savings accounts

Unfortunately, a savings account is also one of the least rewarding ways you can save your money. The interest you earn in a savings account is often very low, currently ranging somewhere in between 1% and 2% per year. These rates vary from bank to bank, so you must check with the banks in your local area to find out the current rates. It is possible to find higher rates depending on your area and financial situation, so it is important to shop around when you are considering opening a savings account. No matter what rate you do find on a savings account, it will be much lower than you can get on other types of accounts and even many investor savings accounts.

There are also no tax benefits to putting your money into a savings account. In fact, if you grow the account large enough, you will actually be expected to pay taxes on the interest you earn each year in the account. Other savings plans such as an IRA grants you certain tax benefits that can help you each year on your returns.

Savings accounts have long been the traditional American way of saving, but that has been changing in recent years. While they are still one of the safest places to store your nest egg, the interest rates they earn are far lower when compared to other investment opportunities available on the market. Today, the savings account is more suited to store your emergency fund and nothing more, as you can invest the rest of your money in other ways that will earn you far more interest. Still, savings accounts do have their place in a comprehensive financial plan, and if used correctly, can help you guarantee that you have the money you need for a rainy day while still earning at least a little something back.

More from Personal Finance Cheat Sheet: