“Save for a rainy day” is an age-old saying that emphasizes the importance of developing a saving habit and putting some money away from what you earn for a future need. There are several reasons why you should save: you could suddenly lose your job; your business could incur losses, you may need to meet an unforeseen expense and it’s also an effective way to achieve financial independence. Sometimes your savings can mean the difference between life and death, especially where emergency medical situations are involved. Without enough money in savings or ownership of an asset that you can quickly liquidate – convert into cash – you can easily find yourself relying on payday loans, credit cards or even donations to meet your most basic financial obligations.
Opening a savings account is the most prudent method to save and secure your future. Today, there are many different types of savings accounts in the banking market, each designed to meet the personal needs of various clients. To find the perfect account for you needs, you must have an intricate understanding of these accounts.
Types of Savings Accounts
Regular Savings/Saver Account
Regular savings accounts offer a basic platform to save money more efficiently, usually on a monthly basis. They can be opened at any bank by any qualified person who wishes to start saving. Although features of regular savings accounts vary from bank to bank, these accounts commonly offer an interest rate of up to 3 percent, require a small minimum balance and restrict the number of times holders can move access the money. While these accounts are a good place to start for beginning savers, the interest rates are way too low and, as such, cannot help to substantially grow your money.
Money Market Savings Account
If you are interested in trading in financial instruments- such as treasury bills- that mature very quickly and can be converted to cash easily, then you need a money market savings account. The account offers substantially higher interest rates (up to 20% if you maintain a certain daily amount in the account), requires holders to maintain a high daily minimum balance, allows a number of transfers and withdraws in a month, and checks can be written on it, too.
Certificate of Deposit
In simpler terms, CDs are savings accounts that are sold to people who want to save a certain amount of money for a fixed period of term and earn a fixed amount of interest. Term lengths usually vary from as short as 3 months to as long as 10 years, but the longer you save, the more interest you earn. These accounts are suitable for big depositors.
Credit Union Savings Account
Credit unions are financial co-operatives with members who pool savings and lend to one another. Opening a savings account at a credit union enables you to save some money while enhancing your chances of securing a loan. Unlike bank accounts which yield interest based on interest rates, credit union savers earn an annual dividend depending on the amount of money they save annually. Sometimes no dividend is paid out, especially when the union doesn't generate any income. Credit union savings accounts cost very little to maintain and are ideal for people who encounter difficulties opening one at a bank.
It is important to note that besides these accounts, some banks may offer other specialized types of savings accounts targeting specific clients, for example, small business owners.
Now that you know all the types of savings accounts that are available, let’s discuss what you should consider before opening one.
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Factors in Choosing a Savings Account
The Quality of Savings Institution (Bank/Credit Union/Building Society)
Although banks are heavily regulated by the central banks of the countries in which they operate, some engage in malpractices that lead to insolvency. When a bank fails, recovering your money can be a long, painful process. As such, you must evaluate the asset quality and reputation of a savings institution before opening the account. Talk to friends who hold similar accounts in your preferred bank and study online reviews to get a better view of what existing customers are saying.
Even though private financial institutions offer higher interest rates, they are riskier than state-owned institutions.
Rate of Interest
Banks use interest rates to attract customers who are looking to open savings accounts. The rates vary from bank to bank, so it is necessary to analyze the rates offered by your preferred banks and settle on the most competitive one. Also, look at whether the savings account you plan to open is fixed-rate or variable rate. Fixed-rate accounts offer a pre-determined interest rate that will not change until the savings mature. On the other hand, the interest rate of a variable-rate account is not static. It will likely shift back and forth (in many jurisdictions, there are laws that regulate how low or high the rate can go), often depending on prevailing market conditions.
Minimum Balances (and Hidden Fees)
Various savings accounts have different minimum balance requirements, from as little as $1 to as much as $20,000 or more. As a beginner looking to develop good spending and saving habits, you don’t need an account with a high minimum balance or opening deposit. But if you are an entrepreneur who regards savings accounts as low-risk investments with the potential to earn good returns, you can go for accounts with high minimum balance requirements, since they typically offer higher interest rates. Many banks charge a penalty when you fail to maintain a minimum balance in your savings account, so ensure you are aware of this, as well as other (hidden) fees that may cost you.
How long do you want to save? To answer this question correctly, evaluate your objectives. Are you, for instance, trying to accumulate funds for a rainy day? Do you plan to buy a car, house or other asset with your savings? Or, are you just looking to take advantage of attractive rates of interest offered by a certain bank? If your intention is to save with unforeseen expenses in mind, a regular or credit union savings account that allows you to access your cash on demand without incurring high charges, can serve you well. However, when your only aim is to accrue interest, you need a money market savings account or a CD with a longer maturity period.
Ease of Access
Don’t lock up your money in a fixed-term savings account if you know you may need to access the money from time to time. Before opening an account, be sure to read the fine print and know the number of times you are allowed to make transfers or withdrawals, and how much money you can transact. If you anticipate your transactions to exceed the set limit, examine the applicable penalties and determine if the account is worth it. Will you, for example, lose your accrued interest?
Additional Account Features
Beyond the common features of savings accounts, individual institutions tailor additional benefits into their products to make them more competitive. Such add-ons may make the account more convenient to use and enhance its yield. For example, some banks allow automatic transfers. This means that if you hold a checking account and a savings account with the same bank, it is possible to schedule regular, automatic deposits from the former to the latter. This saves you time, as you don’t have to make regular trips to the bank or ATM to make a deposit.
Bank failures are rare, but they do happen. To protect your savings, look for a bank that offers insured savings accounts, particularly if you want to open a money market account or certificate of deposit that will handle huge chunks of cash. In the US, the Federal Deposit Insurance Corporation and National Credit Union Administration provide deposit insurance to qualifying banks and credit unions respectively. By opening an FDIC or NCUA-insured savings account, savings worth up to $250,000 will be protected against loss. In the UK, the Financial Services Compensation Scheme offers insurance for individual savings up to £75,000, and joint savings up to £150,000.
Taking the step to open a savings account could mark the beginning of your journey to financial freedom. Now you have all the essential information you need to scrutinize the flurry of savings accounts in the market and pick out one that perfectly suits your needs, be it saving for a rainy day, accruing interest or preparing for retirement.
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