Most financial advisors (rightfully) preach about the importance of saving. While saving and other financial tactics like investing may seem like a luxury for the wealthy, they are essential for all of us. Some financial gurus believe that prioritizing putting money into your savings account can be the best way to save money and help you develop tremendous wealth.
They recommend setting up an automatic monthly transfer of up to 10-20% of your income and funneling it into your savings, emergency fund, or investment fund. However, if you’re just starting your financial wellness journey, this may all seem overwhelming.
So what is a savings account, anyway? Why is it important to open one? Don’t worry, here at Academy, we want to help you build your financial know-how. Keep reading to learn more.
What is a savings account?
A savings account is one of your greatest weapons and first steps in fighting for your financial wellbeing. It is a bank account that allows you to set aside money while still maintaining it easily accessible.
With a savings account, it’s easier to figure savings into your budget because you can deposit or transfer funds that you don’t plan on spending in the immediate future to safeguard it from sticky fingers (yours and others’).
To learn about how to maximize your savings account benefits and avoid pitfalls, keep reading.
Benefits of having a savings account
Having a savings account is beneficial because it allows you to safeguard your money for the future and to help it grow, albeit modestly.
Stashing your money in a savings account is far safer than squirreling it away into a piggy bank or under your mattress. Bank security and regulations protect your money in a savings account far better than your faithful (but sleepy) doggo from home invaders or shifty emergency sprinklers from fire.
Make it grow
Putting money aside in a savings account is important because it mobilizes your money. Interest rates on your savings, albeit low, can help you modestly grow your savings. In a piggy bank, your money can’t grow.
Reach your financial goals
Growing your money for the future is important for a number of reasons. For example, putting money aside for emergencies, saving for retirement and meeting other financial goals down the road are key to cultivating financial wellbeing.
That being said, savings accounts are a wonderful tool to accomplish this purpose, but should not be your sole means of growing your money as a part of a healthy, diversified financial portfolio.
What are the pitfalls of a savings account?
While an important financial tool, a savings account shouldn’t necessarily be your sole means of helping your money grow.
It should not be your only investment tool primarily because they typically have low interest rates. Even for investors with a low tolerance for risk, there are options that can complement traditional savings accounts in order to help you grow your money.
For example, consider certificates of deposits, peer to peer lending, high yield savings accounts and investment apps.
- CDs: Certificates of deposit are sold by banks, lending institutions or other financial institutions, and state that the holder of the promissory note will be paid a particular interest rate on their initial investment. CDs are very low risk and there are a number of plans available, from 6 months to 5 years.
- Peer to peer lending: Strategic lending to peers with good credit scores can be a relatively safe investment strategy.
- High yield: This one allows you to make more in annual interest than typical accounts, with virtually no risk.
- Investment apps: Apps like FlexInvest allow you to make small investments and grow them overtime.
Opening a savings account is foundational to improving your financial wellbeing.
They allow you to safeguard money and modestly grow it for the future. Remember that saving and investing aren’t luxuries for the wealthy, even when your budget is tight.
Keep exploring our financial literacy library to learn more tips to grow your money!