The savings account was once a major feature of every household budget. When world economies were tied to theGold Standard, no nation could create more money or currency than it had enough gold to redeem. In theory, you could take adollar bill to any bank and exchange it for a fixed amount of gold. And gold coins were minted at fixed values that never changed.
Banks earned their profits by issuing loans to customers that were covered by their depositors’ assets. That is, when people deposited money into their savings accounts, the banks paid them interest. But to make a profit the banks had to loan that money to other customers and charge them slightly higher interest. Most loans were issued to businesses and wealthy investors. After nations began abandoning theGold Standard in the 1930s banks were able to borrow money fromcentral banks, who issued debt in the form of bonds to cover the loans they made to their bank customers.
The individualsavings account became less important to the banking system. But there are still several benefits for people who open savings accounts.
- Savings accounts create stable cash flow
- Savings accounts help you avoid using credit
- Savings accounts provide easy access to emergency funds
- Savings accounts assist with long-term budgeting
- Savings accounts may cover checking account overdrafts
- Savings accounts help you reach financial goals
- Savings accounts may earn interest
1 – Savings Accounts Create Stable Cash Flow
Whether you manage a business or merely your own personal finances,cash flow is the basis of every financial transaction you conduct. When you collect a paycheck or if someone gives you money, you haveinward cash flow orpositive cash flow. When you spend money you haveoutbound cash flow ornegative cash flow.
If you work several jobs, are paid irregularly, earn money from investments, and otherwise have an unpredictable income, a savings account allows you to create a stable cash flow. By depositing all your income directly into your savings account you can set up 1 to 6 regularly scheduled withdrawals to your checking account. This way you can create a budget around a steady, predictable income.
This is how businesses manage their money. They deposit enough money into the bank to smooth the flow of money into and out of their accounts so they don’t have to worry about being late on bills or paying extra banking fees.
It is better to manage your cash flow from a savings account than a checking account because you cannot spend money freely from your savings the way you can from your checking.
2 – Savings Accounts Help You Avoid Using Credit
Credit is not necessarily a bad thing. If you wish to buy a home or a car you will probably need to take out a loan to make the purchase. You’ll need to establish good credit worthiness to do that. Using a little credit to show lenders you’ll be a good customer for a home or vehicle loan makes sense.
But too many consumers rely on credit cards for incidental purchases. The credit cards cost you money because they charge interest, overage fees, late fees, and possibly other fees. The more fees and interest you pay on your purchases the more expensive those purchases become.
Putting money aside in a savings account for future purchases saves you more than you think. If you can pay cash for luxury items that cost several hundred dollars – instead of paying for them with credit cards – you’ll save yourself a lot of money by avoiding interest fees and more.
Your savings account may not earn much money but if you use it wisely it will help you save a lot of money.
3 – Savings Accounts Provide Easy Access to Emergency Funds
Every year companies likeBankrate ask American consumers how they would handle financial emergencies. Since the Great Recession of 2008, millions of Americans have struggled to meet emergency expenses. At the beginning of 2020, Bankrate found that only 41% of Americans could cover an emergency expense of $1,000 from their savings. Thankfully the survey found that only 3% of those surveyed would have no way to cover such an unexpected expense.
But the remaining 56% of Americans would have to borrow part or all of the $1,000 to cover that emergency.
Because American consumers are so accustomed to using credit they don’t save enough money to handle emergency expenses. This means that for millions of people every year, unexpected emergencies cost even more than how much money they initially borrow. As interest and fees add on to the costs of those emergencies, they become more expensive.
This is the best reason why you should always have at least some money in your savings account.
4 – Savings Accounts Help with Long-term Budgeting
Whether you plan to buy a house, a car, or pay for your children’s college education, a savings account simplifies your budgeting. As you deposit money into a savings account you take it out of your budget. Your budget should only be based on what money goes into your checking.
The savings account makes it easy for you to see how much money you have saved for that future purchase or expense. With enough time you can save all the money you need for some very big expenses. Some families pay for their houses and cars directly out of money they save, avoiding financing altogether.
Even if you only save for a down payment on a mortgage, you’ll avoid the extra expense of mortgage insurance.
Very few people are able to use their checking accounts to both save money and cover their regular expenses. It’s much easier and safer to deposit money you don’t need into a savings account. Some people set up several savings accounts, including 1 for emergencies and 1 for long-term budgeting.
5 – Savings Accounts May Cover Checking Account Overdrafts
It’s embarrassing to have a scheduled payment rejected because you don’t have enough money in your checking account. It’s wise to schedule as few payments as possible but sometimes you cannot avoid doing this. Most banks allow you to use a savings account to cover overdrafts in your checking. This helps you save money because you don’t pay NSF or Overdraft fees.
Your bank charged you an NSF (insufficient funds) fee when they don’t honor your check or scheduled payment. Your bank charges you an Overdraft fee if they cover the cost of your payment even though you don’t have money in your checking account.
Although it’s better to spend less money than you have in your checking, if you connect it to a savings account with an overdraft plan you’re less likely to incur unexpected costs.
6 – Savings Accounts Help You Reach Financial Goals
Setting money aside to cover emergencies and unexpected overdrafts is very helpful. But regardless of what your age is, you should always set at least a few financial goals.
By depositing money into a savings account at every opportunity you can easily check your progress toward your financial goals by looking at your savings accounts’ balances. Whether you want to save $1 million or buy a house, the first step toward achieving that goal is setting money aside. A savings account is a safer place for your money than a box under your bed.
If your home burns down you’ll lose all the money in your saving box. If your bank fails your savings account is insured by a government entity such as the F.D.I.C. or F.S.L.I.C.
Even though you may deplete your savings account to cover an emergency, by contributing to it on a regular basis you’ll keep working toward your financial goals. Automatic deposits to savings make this much easier.
7 – Savings Accounts May Earn Interest
Although the interest-based incentive to save money is now very small, it’s better to earn a few pennies a month on your unspent funds than to leave them in a checking account or your wallet.
Before deciding that pennies are not worth earning, consider the compounding effect of interest payments over many years. The more money you keep in savings the more money it will earn.
While it’s true there are better ways to earn passive income, you still need to use a savings account as a buffer against unexpected expenses. You should only transfer money to better-paying investments when you can leave enough in savings to handle emergencies. And that money will still earn a little bit of interest for you.
Conclusion
Although their role in the financial system has changed savings accounts are still very important financial tools that everyone should invest in. They don’t merely hold money for you. Savings accounts help you avoid additional costs and expenses on many purchases, and the less money you spend needlessly the more money you will have to spend when you really need to.
It’s a good idea to deposit all your income into your savings account every month and then transfer only what you need to spend to your checking account for many reasons. In a way you become your own boss. You decide how much to pay yourself each week or month.
That is the superpower of the simple savings account: it gives you a bit of financial independence while helping you work toward financial security. If you’re wondering whether a savings account is worth it, the answer is yes. A savings account is worth every penny you invest in it, and it will help you save more than just the money you deposit into it.
