Why is it Important to Have a Savings Account?
Many consumers have a checking account and usually have a debit card too, but there are still many people who do not have a savings account set up. For one reason or another, the majority of consumers who open a checking account usually do not open a savings account at the same time, but they really should.
The number of American households that have no emergency cash in the bank to fall back on is astounding. Approximately 26% of adults have no savings set aside for emergencies while another 36% have yet to start putting away money for their retirement.
Listed below are some significant reasons why you should open a savings account today, as well as the importance of managing your money in the savings account:
Unforeseen spending –
You can never recognize beforehand when an urgent situation will take place. A broken major appliance or an expensive automobile repair can put a huge dent in your finances. Although you have probably arranged your insurance coverage on all fronts, you almost certainly will still encounter those nasty deductibles. A vehicle accident, a serious illness or a fire at your residence can necessitate considerable out-of-pocket costs. Life can damage the budgets of even the most financially disciplined people; nevertheless, a savings account is almost always able to cover the gaps and help keep you out of debt.
Asset protection –
The returns linked with savings accounts traditionally have been smaller than those of other types of investments. For instance, real estate, bonds, and stocks offer a much higher rate of return than a savings account ever could. However, tying up all of your capital in illiquid or speculative investments for the likelihood of a superior return means that you might be enforced to sell at an unfortunate time due to an unexpected expense or emergency. Having a savings account open is a good way to protect your investment collection from loss via forced selling.
Leveraging chances –
Managing a savings account enables you to take advantage of possible profitable monetary opportunities. If you happen to stagger upon a rare but wonderful business opportunity, you might not be able to invest in that opportunity if you do not have sufficient money to put forward. Furthermore, if you attempt to get credit with your bank for whatever purpose, a vigorous savings account can improve your prospects of achievement. A savings account is able to exchange a few words about discipline and stability to a loan representative.
The capital that you deposit in a money market or savings account is protected by FDIC insurance. Which means that even if your bank were to suddenly go bankrupt and close, the government will substitute your funds up to a certain amount. Money can be lost, destroyed or stolen but if you deposit that same money into a bank in a savings account, more or less it is secured. You are also able to earn some interest while depositing your money in an interest-bearing savings account.
Self-determination from credit –
A savings account may enable you to attain your financial targets without employing the use of credit or a loan. When you purchase something on credit, you are paying for the freedom of being able to get the item right away, although you don’t actually have the money on hand to purchase it. If you amass a decent amount of money in a savings account, it permits you to purchase some things that you desire without having to rely on a loan or use credit and possibly lower your credit score by doing so.
Life is full of unexpected twists and turns. And when the unexpected happens, such as accidents, sickness or a furnace dying, you need money to pay for the unplanned bills. Having a savings account makes the money easily available to you. You don’t want to have to rely on credit every time something breaks in your house or if you get a flat tire. Having a savings account for these kinds of unexpected emergencies is so invaluable and important.
The money is there when you need it –
If you require easy access to your money, a savings account can offer you that. Keeping it at home is not a good idea because it may get lost or stolen. On the other hand, if you put all your money into investments like stocks and bonds, you won’t have any when you need it. Money saved in a savings account is easily accessible. You can withdraw it anytime you need too. Just make sure you understand the terms of your savings account. Sometimes there are a maximum number of withdrawals from your savings account every month without a fee. If you go over that number of withdrawals you could get hit with a penalty fee.
Make your money work for you –
If you can open a high-interest savings account that’s the way to go. Your money will essentially be making you more money just by being in there. The more you invest the more interest for your savings you are likely to get. You can use this free tool to compare the highest savings interest rates across thousands of banks and credit unions: https://www.nerdwallet.com/rates/savings-account/
Save money for major life-changing goals –
How many times have you been told that you better save money for retirement? That’s because it’s important to start ASAP. Retirement, however, shouldn’t be the only life goal you save toward. In fact, there are several milestones in life that will require you to crack open your wallet or write a hefty check. Consider the following life-changing goals: college, marriage, buying a house, children, etc. If you have a bucket list that includes things like traveling, having new experiences, etc. then you’ll need money to do those things as well. It’s important to save for these life-changing and wonderful experiences.
Once you have opened a savings account, one of the best ways to save some money is to automate your savings so you don’t have to remember to set aside money every time you get paid. There are many innovative and easy-to-use automated saving tools that can help you save automatically, and can make saving money almost as easy as spending it.
Moreover, there is a general agreement throughout the financial expert community that having a savings account will help to give you peace of mind since it enables a person to plan for whatever he/she desires to accomplish, purchase, or repair.
So the next time you set up a checking account or the next time you walk into your bank, ask them about their savings account options. It really is one of the best financial decisions that you can make for yourself and for your family.
Not to be confused with Savings.
Saving is income not spent, or deferred consumption. Methods of saving include putting money aside in, for example, a deposit account, a pension account, an investment fund, or as cash. Saving also involves reducing expenditures, such as recurring costs. In terms of personal finance, saving generally specifies low-risk preservation of money, as in a deposit account, versus investment, wherein risk is a lot higher; in economics more broadly, it refers to any income not used for immediate consumption.
Saving differs from savings. The former refers to the act of increasing one's assets, whereas the latter refers to one part of one's assets, usually deposits in savings accounts, or to all of one's assets. Saving refers to an activity occurring over time, a flow variable, whereas savings refers to something that exists at any one time, a stock variable. This distinction is often misunderstood, and even professional economists and investment professionals will often refer to "saving" as "savings" (for example, Investopedia confuses the two terms in its page on the "savings rate").
In different contexts there can be subtle differences in what counts as saving. For example, the part of a person's income that is spent on mortgage loan principal repayments is not spent on present consumption and is therefore saving by the above definition, even though people do not always think of repaying a loan as saving. However, in the U.S. measurement of the numbers behind its gross national product (i.e., the National Income and Product Accounts), personal interest payments are not treated as "saving" unless the institutions and people who receive them save them.
Saving is closely related to physical investment, in that the former provides a source of funds for the latter. By not using income to buy consumer goods and services, it is possible for resources to instead be invested by being used to produce fixed capital, such as factories and machinery. Saving can therefore be vital to increase the amount of fixed capital available, which contributes to economic growth.
However, increased saving does not always correspond to increased investment. If savings are not deposited into a financial intermediary such as a bank, there is no chance for those savings to be recycled as investment by business. This means that saving may increase without increasing investment, possibly causing a short-fall of demand (a pile-up of inventories, a cut-back of production, employment, and income, and thus a recession) rather than to economic growth. In the short term, if saving falls below investment, it can lead to a growth of aggregate demand and an economic boom. In the long term if saving falls below investment it eventually reduces investment and detracts from future growth. Future growth is made possible by foregoing present consumption to increase investment. However savings not deposited into a financial intermediary amount to an (interest-free) loan to the government or central bank, who can recycle this loan.
In a primitive agricultural economy savings might take the form of holding back the best of the corn harvest as seed corn for the next planting season. If the whole crop were consumed the economy would convert to hunting and gathering the next season.
Classical economics posited that interest rates would adjust to equate saving and investment, avoiding a pile-up of inventories (general overproduction). A rise in saving would cause a fall in interest rates, stimulating investment, hence always investment would equal saving. But Keynes argued that neither saving nor investment was very responsive to interest rates (i.e., that both were interest inelastic) so that large interest rate changes were needed to re-equate them after one changed. Further, it was the demand for and supplies of stocks of money that determined interest rates in the short run. Thus, saving could exceed investment for significant amounts of time, causing a general glut and a recession.
Saving in personal finance
Within personal finance, the act of saving corresponds to nominal preservation of money for future use. A deposit account paying interest is typically used to hold money for future needs, i.e. an emergency fund, to make a capital purchase (car, house, vacation, etc.) or to give to someone else (children, tax bill etc.).
Within personal finance, money used to purchase stocks, put in an investment fund or used to buy any asset where there is an element of capital risk is deemed an investment. This distinction is important as the investment risk can cause a capital loss when an investment is realized, unlike cash saving(s). Cash savings accounts are considered to have minimal risk. In the United States, all banks are required to have deposit insurance, typically issued by the Federal Deposit Insurance Corporation or FDIC. In extreme cases, a bank failure can cause deposits to be lost as it happened at the start of the Great Depression. The FDIC has prevented that from happening ever since.
In many instances the terms saving and investment are used interchangeably. For example, many deposit accounts are labeled as investment accounts by banks for marketing purposes. As a rule of thumb, if money is "invested" in cash, then it is savings. If money is used to purchase some asset that is hoped to increase in value over time, but that may fluctuate in market value, then it is an investment.
Saving in economics
See also: National savings
In economics, saving is defined as income minus consumption. The rate at which people do this is called the marginal propensity to save or average propensity to save. The rate of saving is directly related to both the interest rate and investment, largely by way of the capital markets.
- Dell'Amore, Giordano (1983). "Household Propensity to Save", in Arnaldo Mauri (ed.), Mobilization of Household Savings, a Tool for Development, Finafrica, Milan.
- Modigliani, Franco (1988). "The Role of Intergenerational Transfers and the Life-cycle Saving in the Accumulation of Wealth", Journal of Economic Perspectives, n. 2, 1988.