Let's be honest, a savings account might not seem important when you're first setting up your finances. And even when you have been earning for a while, saving is synonymous to lesser income, less extra cash and a boring life. Despite this, most financial advisors and experts will tell you to save. If you're wondering if saving is important then this article is for you.
Reasons for Getting a Savings Account
According to the FDIC, the current national interest rate on savings accounts sits at an average of 0.06% Annual Percentage Yield. This percentage may not feel impressive, but having a high yield savings account isn’t the sole reason for having one.
Below are the top secrets you probably didn't know until now on why financial planning and having a savings account might be the best for you:
1. Financial Security and Emergency Funds
One of the main reasons why you should have a savings account is to create an emergency fund. Life is unpredictable, and having a financial safety net for unexpected events such as medical bills, car repairs, or job loss is important. It is also a better option than opting for loans.
For financial security, it is best if you have a minimum of roughly between three to six months’ worth of living expenses set aside in a savings account.
2. Encouraging Disciplined Saving
A savings account encourages disciplined saving by separating your spending money from your saved money. Many banks offer features like automatic transfers, which help you set aside a portion of your paycheck regularly without thinking about it. Building this habit early can lead to long-term financial stability, and make it easier for you to achieve financial freedom in the long run.
3. Interest Earnings and Savings Security
Savings accounts are interest-earning accounts, meaning your money grows over time, even if it's sitting in the bank. While the interest rates on standard savings accounts might not be high, opting for high-yield savings accounts can offer significantly better returns.
By simply depositing money in these accounts, you can earn passive income, making your savings work for you. And you won’t even have to worry about the safety of your funds since they’re properly protected. In the US for instance, bank accounts are insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA). This insurance protects your funds in case of bank failure, providing peace of mind.
4. Avoiding Debt Cycles
As it has been mentioned above, having a savings account helps you avoid debt. When emergencies or big expenses arise, people without savings are often forced to rely on credit cards or loans that have high interest payments, but with a savings account with enough funds, you can handle these situations without incurring debt.
5. Achieving Financial Goals
Whether you're saving to purchase a home, go on a vacation, or you're simply working towards retirement, a savings account provides you with a solid base to keep you on track. By setting aside money in a savings account, you can systematically work toward your financial goals.
Closing Notes
A savings account is one of the surest ways you can plan financially, avoid debts, and live a financially secure life. While it might not be the best way to grow your funds, it can serve as that cushion you need in case of emergencies.