A Basic Guide to Savings Accounts

Savings accounts are an easy way to create an emergency fund or save for a future event. They are also a great way to introduce children to the concept of saving. Here is some basic information to help you get started on the road to saving.

What is a Savings Account?

Investopedia.com defines a savings account as “a deposit account held at a bank or other financial institution that provides principal security and a modest interest rate.” It is basically a bank account that earns interest. Savings accounts are considered one of the most liquid investments after cash and demand notes. Unlike a checking account, a savings account is generally not used for everyday expenses, although some do have check writing features. Most accounts offer a limited amount of transactions and transfers free of charge on a monthly basis.

Who Should Have a Savings Account?

Experts agree that anyone interested in saving for the future should have a savings account. Savings accounts allow people to build savings over time, while providing a solid foundation for future financial stability.

One of the best uses for a savings account is its use as an emergency fund for unexpected expenses, such as a car purchase or repair, home maintenance expenses and medical deductibles or bills. Using the cash in an emergency fund, rather than a credit card, avoids having to pay interest in the event that the balance is not paid off immediately. Financial experts recommend that a savings account hold a balance equal to three to six months of living expenses to cover financial emergencies.

Savings accounts allow people to save for big ticket items, such as a vacation or a down payment for a new home, in manageable, incremental amounts. By looking at the length of time you have to save and the amount needed, people can systematically save a specified amount of money to reach their goal.

Savings accounts are an excellent way to teach children how to manage money at an early age. Many banks have special accounts just for children that reward them for saving. Some experts feel that by opening a kid’s savings account that parents or grandparents can create lifelong savers.

Finally, anyone looking to build healthy financial habits should open a savings account. Most financial institutions allow automatic deposits into savings accounts so account holders do not even need to remember to transfer funds. By watching the account grow, impulse spending is often reduced since you may not want to spend those dollars you have saved on a spontaneous purchase.

How to Find the Best Savings Account Interest Rates

Currently rates are at historic lows and vary from 0.2 percent to 2 percent depending on the financial institution and account balance. If you have a significant amount of money to invest initially, consider looking at a high yield savings account. These accounts pay a higher rate of interest since the investment is higher.

If you are willing to invest with an on-line bank, they traditionally offer higher rates since they have lower overhead. If you are comfortable managing your funds on-line, this is a great option.

There are on-line sites that assist consumers in finding the best savings account rates. Bankrate.com and money-rates.com allow users to do an on-line search for the best rates based on their amount of deposit.

In addition to banks, some investment companies, such as Fidelity and Schwab, also offer an account that operates like a savings account. Most require a minimum balance. It is important to note that investment companies are subject to Securities and Exchange (SEC) rules rather than banking laws.

How to Compare Savings Account Plans from Different Banks

The above referenced sites, bankrate.com and money-rates.com, can also be used to compare banks either locally or nationally. Both sites allow users to select either national or local when searching. Local search is done by zip code and brings up local banking branches as well as competitive on-line banks. The search discloses any minimal balance requirements, transfer restrictions and any fees associated with an account.

Both searches disclose important information about each institution such as recommendations from an investment magazine such as Money and whether the institution is covered by the Federal Deposit Insurance Corporation (FDIC). Users can also elect to search for a high yield or high interest savings account on these sites.

Many local banks post their current interest rates either in their lobby along with those of their local competitors. If you have a good relationship with your bank, you may want to call and get their current interest rates. Many will offer a higher interest rate with automatic deposits or if you have additional accounts with them.

What are the Benefits of an Online Savings Account?

Unlike a local brick and mortar bank, an on-line bank does not have the overhead expenses of branches. As a result, on-line banks generally offer a higher interest rate. They also offer 24/7 access to your account, via their website or an ATM.

On-line banks generally have well-developed, easy to navigate websites since they conduct all of their business over the internet. While traditional banks offer on-line banking and may have a good website, they generally pale in comparison to on-line banks. Like traditional banks, on-line banks carry FDIC insurance up to $250,000 per account.

One advantage that people seldom consider is that an on-line creates a barrier of sorts between your money used to pay everyday expenses and money for long term use. By having to work a bit harder to withdraw the funds, you may pause before making a withdrawal. Should you need to make a withdrawal, on-line banks allow for easy transfers to a checking account, generally within two business days with no fee. Many also offer an ATM card, but there may be a minimal fee to use the card.

What Are Important Things to Consider When Choosing a Bank for Your Savings Account?

There are generally six things to consider when choosing a bank.

1. Interest rates. Is the interest rate competitive relative to other banks? Are you happy with the rate? How often does the rate change?

2. Traditional or on-line? Are you comfortable banking with an institution that you can only access by computer or phone? Do you like having physical access to bank representative if you have questions or issues with your account? Is it important to have all your accounts in one place?

3. Convenience. How easy is it to do business with your financial institution of choice? If you opt for a traditional bank in your area, do they have convenient business hours? Are they close to your home or place of business? If you are using an on-line bank with an ATM feature, are their ATM’s nearby?

4. ATM’s. Regardless of the type of bank you choose, if you will be withdrawing funds via an ATM, are there fees associated with the use of the card?

5. FDIC Insurance. Always be sure the institution is insured by the FDIC. While investment companies aren’t covered by FDIC, banks and credit unions are.

6. Restrictions on the account. Be sure to get any restrictions on the account in writing. Many accounts limit the number of withdrawals or transfers that can be made in a month or that can be made without incurring a fee. Some accounts also charge fees if the account balance goes below a set level. Any restrictions should be spelled out in the paperwork associated with opening the account.

Savings accounts are a convenient and safe way to save money. While they do not pack the investment return of a mutual fund, they do provide a convenient, safe and consistent way to save.

References:

http://www.investopedia.com/terms/s/savingsaccount.asp#axzz2Ku9PFk00
http://www.bankrate.com/finance/savings/finding-the-best-savings-interest-rates.aspx
http://www.depositaccounts.com/blog/online-savings-accounts.html
http://www.bankingmyway.com/save/savings/choosing-right-bank-you