Ah, the good old savings account. This is often the only account most of us have or have even heard of before high school. A savings account is an account you can open with a bank. You put money into it, and it sits there, safely, waiting for you to need it. But what’s the big deal? Why is a savings account any better than stashing money in a piggy bank or under a mattress?
Two words: interest and insurance.
Unlike the money that sits in your piggy bank, money in a savings account earns interest. This means that the bank is loaning your money to people and paying you something as a thank you. Don’t worry, your money is still there and you can access it whenever you want. It’s just being used as part of the big pool of money the bank has to lend.
Sounds awesome, right?
Well, this is a great arrangement for the banks, too, because they make the people to whom they loan money pay interest back to them, and that interest is a lot higher than what they pay you! Still, it’s fun to think of your money growing without you doing a thing except putting it in a bank.
You might have heard complaints about “low interest rates” in savings accounts over the last few years. It is true that the interest you earn on savings accounts is pretty tiny right now, but you’ll likely see interest rates rise and fall several times over your lifetime. Even a tiny interest rate is better than no interest, which is what you’d get from a piggy bank. Right now, the highest interest rates on savings accounts are around 1%. You definitely won’t get rich from your savings account, but, hey, it’s something.
The second benefit of storing your money in a savings account is the insurance the bank offers on your money. Any money you put in a savings account (up to $100,000) is insured by the bank and stored in a fireproof safe. This means that if the bank goes out of business or burns down, you can still get your money back. If something happens to your piggy bank, though, that money is gone. Vanished. Kaput.
Something else money in a savings account is protected from? You!
If you are a spender, a savings account is your friend. Once money is in the savings account, the only ways to get it out are to physically go to the bank or ATM to get the cash or have it electronically transferred to another account, like a checking account. Most transfers take about three days to go through, which makes impulse spending difficult. It’s not foolproof, but by making spending your saved pennies difficult, savings accounts can help you break habits that keep you broke.
Know before you save
Ready to get a savings account of your own? Wait! There are a few things you need to know before you sign on the dotted line. Not all savings accounts are created equal. Learn about how to pick the right savings account for you and set yourself up for success in your saving journey.
If you want to know about other types of accounts, check out other articles in my “What Is…” series.