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What is a savings account?

Simple Definition
A savings account is a basic type of product held at a financial institution that lets you safely store money you don’t plan to spend right away while earning interest.
savings account

Why you need a savings account?

Most financial advisors (rightfully) preach about the importance of saving. 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.

That is why a savings account is one of your greatest weapons and first steps in fighting for your financial wellbeing. It helps you to easily 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’).

example

A savings account is a great way to safeguard money for specific financial goals like building an emergency fund or paying for a new home. The best part is that the money in your savings account keeps earning interest as time goes by. So, imagine having $1,000 in savings with a 2% interest rate. You’d earn an extra $20 at the end of every period your money stays there.

Quick takeaway

The primary feature of savings accounts is that they always earn interest. Think of a savings account as a VIP parking space for your cash, that allows you to grow the money that you don’t intend to spend on a regular basis.

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Benefits of a savings account

To learn about how to maximize your savings account benefits and avoid pitfalls, keep reading.

Safety

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. 

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.

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