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what's the purpose of a savings account?
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Once an Asshole. Trying to be better.Registered User regular
Once an Asshole. Trying to be better.Registered User regular
What's the purpose of a saving account? I mean, the interest rates are way to low to call it an investment. I would be a nice play for liquid cash but with today's technology I can liquidize stocks and have cash in a few days. If I need immediate funds I have ton of credit I can tap into and pay back in full later.
I honestly can't think of a reason to have a savings account. Am I overlooking something?
I honestly can't think of a reason to have a savings account. Am I overlooking something?
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I'm no financial expert, but I'm fairly sure putting the burden of your savings on your stocks and credit is not demonstrating financial responsibility. You should have all three, saving at the expense of investments, and never using credit in such a foolhardy way.
What happens when you plunk 3k to fix your car down on your card, then your investment manager says they can't liquidate your money until next month (this happens)? Or you take a substantial loss pulling your money out of a fund of some sort (this also happens)? What about when the tax man comes for their share of liquidating said investments?
Wouldn't you rather slug 10% of your check in an account and avoid all that headache?
But my checking account allows me to do all that and has a compramable interests rate (next to nothing).
On a positive note, you might want to look into that.
My bank's basic savings account has twice the interest rate a basic checking account does. Only when you qualify for the HY checking does it become a better option.
You're not supposed to use credit as your cushion. While "points" are great and all, it's very easy to slip up or get caught out and end up under water. Whereas, if you simply have the money stashed somewhere, you don't risk that.
I was taught that you shouldn't ever have all your money in one place, and you should: have access to the majority of it on any given day, while not being able to spend it unless you consciously make it available. Savings accounts do all of that.
Edit: Different strokes though.
I used to keep all my money in my checking account, like 90% of it. Strangely enough, I almost never had money saved up, and when unexpected expenses hit, my life would go pear-shaped for a while.
Eventually that got really old. I opened up a few more savings accounts, and started actually allocating money into them.
In under a year I was in a much more secure place financially and have zero debt (not even rotating debt, I never use credit because credit is crazy) outside of student loans.
You might be able to juggle all your numbers and stuff easily and don't need or want places to subdivide your money to make both short and long term saving easier, and good for you.
Most people can't do that, or they realize how much effort it takes to stay on top of their money like that.
ed: generally speaking yes, current interest rates are low enough that what you get from a regular savings account probably isn't a big deal. But it's still 'free' money, and transfers from a savings account to checking are digital and instant assuming they're at the same bank, so it seems a little silly not to use savings for the majority of your cash savings.
that's why we call it the struggle, you're supposed to sweat
TLDR: Savings accounts are usually the only option, or the only reasonable option, to somebody with a small amount of savings. Once you have more than about $2500 to save, a money market account is the next best choice. You shouldn't keep all of your savings in an investment account anyway; you should keep a small amount (somewhere between $2k and two months expenses) in either savings or money market for emergencies.
1) There is a direct relationship between assumed risk and short-term/medium-term reward. Savings accounts are very low-risk, but they also provide less reward. For investment accounts, you're assuming the entire risk yourself, but they can provide higher reward. The stock market could crash at any time and take your savings with it. The middle ground here is the money market account, which is FDIC-insured, and provides higher returns than a savings account, but lower returns than the stock market.
2) Investment accounts usually have transaction fees associated with them. If you're vesting small amounts of money, those fees can eat into your return. Money market accounts typically have minimum balance requirements - $2500 is a common one. If you're saving small amounts of money, a money market account might not be an option.
3) Investment accounts are not legally required to provide you funds immediately upon withdrawal. I don't know what the allowed grace period is, but I think it is up to 7 days. This, combined with the volatility, limits the usefulness of an investment account as an emergency fund. Not everybody has credit cards they can tap into.
the "no true scotch man" fallacy.
"This checking account is for spending."
"This savings account is for not touching until I super need it."
Your stocks could nosedive in value whereas your account is rock solid. It's a risk thing.
Also interest rates used to be 5% and more, making it a valid strategy for the very risk-adverse. So basically they're outdated.
Nope.
Plus people can't steal your check card info and loot your savings account like they can your checking.
but they're listening to every word I say
If the OP is asking why he should put his money in one bank's savings account vs. its equivalent checking account, especially if they have only a tiny difference in interest rate, then the answer to that is based on what your actual needs are. If you need to make more withdrawals than the savings account will allow, then obviously you will want the checking account instead. If you will almost never make a withdrawal, then you might as well get the extra money from the savings account.
But, as I mentioned in the beginning, the real issue here is one of regulation and standardization rather than "why" savings accounts exist when checking accounts are available. In some places, there is no distinction because the government ensures that all bank accounts of a particular kind have minimum standards (e.g., they always allow immediate withdrawals of the entire fund).
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Look into a money market account if you can meet the minimum balance requirement.
the "no true scotch man" fallacy.
This is entirely what it is for.
Typically people have bad spending habits.
If I see I have 10k in my checking account, but 9k of that is "savings" I'm much more inclined to going out to eat and spending $80 on it. It makes you less frugal, which, arguably, is a bad thing if you need it in case your car blows up, or, you need a new furnace or you break your leg and need to cover copays.
Money market is probably the best if you need savings, and can meet the minimum requirement, and need slightly more liquidity than the 1-4 week window on investment checking account type things (they usually lay in the fees after an introductory period so there's that).
You may consider the online banks like capital one or ally, they actually have pretty decent returns on their savings (that match most local banks money markets).
In a lot of cases, you're better off getting denied for a purchase (or even bouncing) with your card but still having your rent safe in savings than not bouncing your card but not being able to pay your important bills at the end of the month. That's one of the big benefits...if you keep a budget and have discipline you're probably fine, but if you aren't disciplined (for example, my dad tends to just buy shit and forget to update him and my mom's ledger) you can get yourself in trouble pretty easily.
On another note, checking accounts often have a minimum balance or fees that are higher than on a savings account. It's usually not much, but it can be easier to have one checking account and a savings account or two and transfer money between them vs. multiple checking accounts.
It's also harder for someone to write a bad check / get your debit card and clean out your accounts. Sure, you might have fraud protection and everything will be straightened out in a few days, but your landlord / Visa aren't going to give a shit why your payment is late.
With respect to money markets and other investment, they don't have the same liquidity and there is an increased risk. You don't want to be stuck cashing out when the markets are down. Also, as was pointed out, cashing out investments may increase tax liability while transferring money from savings doesn't.
Basically though, having checking, credit, savings, and investments are good. You shouldn't have all your money in one place if you can help it, but it's always good to have a month or two of expenses where you can get to it right now if you need it - and a savings account is the best bet for this.
Req Q was repealed in 2011 and checking accounts can pay interest now. Typically the interest rate is still lower then a savings account though. in a few years when rates are at higher levels this will be more apparent then in the current zero rate environment.
Checking account is for day to day spending money. Grocery money, bill money, entertainment money, etc.. It usually has zero interest, but that's ok because you wouldn't keep a lot of money in that account nor keep it there long enough to accumulate interests. It's money you need to spend right now.
Saving account is for saving money you don't want to spend now but you might need in the near to middle-term future, or at the drop of a hat in unexpected circumstances. Emergency money, vacation money, etc. It earns minimal interests, which is nice since it can accumulate to a decent lump of change that can sit there for months. But it's not very high interests, and that's the price to pay to have the money immediately and easily available without penalties whenever you need it.
Investment account is for money you won't need until the long term. This is your retirement fund, or your house down-payment fund. This money will have the highest interest rate, and usually compound interests, and will build up to high amounts over the years. But the downside is that it's not available until several years or decades down the line. And if you try to access it early, you will suffer penalties, both in fees and in taxes on it.
Since the mid-80's, the shape of the financial markets has radically altered thanks to about a billion different things, and savings accounts are almost literally worthless in and of themselves. Nobody gets anything out of them that beats inflation (unless you deposit tens or hundreds of thousands, in which case what are you doing??)
Today, the most useful thing about savings accounts is that they prevent overdraft fees from checking, and you can secure a credit card for a lower interest rate with them.
we also talk about other random shit and clown upon each other
Investments are not something you dip in and out of, they are something you leave untouched for 10+ years. The road to bankruptcy is paved with asset rich cash poor people who thought that if they needed the cash they could just liquidise their investments and then found that the times they needed the cash amazingly coincided exactly with horrendous bear markets that crushed their net wealth.
I made a game, it has penguins in it. It's pay what you like on Gumroad.
Currently Ebaying Nothing at all but I might do in the future.
I then quarterly review the savings account an apportion money to long-term investments, ISA savings (UK tax free account) and fun.
I made a game, it has penguins in it. It's pay what you like on Gumroad.
Currently Ebaying Nothing at all but I might do in the future.
Just to be clear, I'm pretty sure money market accounts are not FDIC insured. My understanding is that technically speaking money market accounts are still investment accounts with associated risks of losing value. They typically use your money in very short term investments, that are supposed to be very stable, and keep the net asset value around a dollar, but there is no mandated insurance.
In 2008 there was apparently 1 large money market manager where holdings went from $1=$1 in assets to $1=$0.97 in assets because they had a lot of bad debt. People panicked and started withdrawing huge amounts of money from those accounts, and the US government stepped in and offered to cover the difference to prevent spreading problems.
This is investopedia's take on it. From the article:
"Money market" funds may or may not be FDIC insured. You'll have to check the prospectus or doc, but if it is dollar for dollar share "mutual fund" (e.g. something or other stable asset fund) then chances are that it is not FDIC insured.
The way I use savings accounts is to segment up moneys into savings and specific use accounts; those funds are "out of sight" and there's an extra step for me to get at it where it is harder for me to spend them. Whatever is in my checking is what I can spend, savings not so much. I have 4 savings accounts right now: 1 for personal savings (cash part of my retirement), 1 for my property taxes, 1 that I use for saving/spending for home improvement and maintenance stuff, and 1 car maintenance fund. This is largely accounting since there is no reason why all these moneys couldn't be in the same bucket, but it helps that I cannot just pulse this money out or spend directly from my debit card, but that I have to go online and do an account transfer into my checking account before I can use it. This accounting behavior has helped me greatly to increase my savings. I'm saving about 20% of my after tax pay vs about 6% before I started separating up my monies into different accounts.
http://wiki.fool.com/Characteristics_of_Money_Market_Instruments
From the horse's mouth: FDIC page on different types of accounts:
the "no true scotch man" fallacy.
Makes perfect sense to me.
6 month or multi-year CD's are probably much better ways to short term or long-term security of money.
In which case, what the shit are you doing with that much money with a CD anyways?
The point of the savings account is liquidity. CD is for earning interest on it, yet it earns no substantial interest, and will have fines for early withdrawal. Even at 2% on a 5 year... eh you might need that money during that 5 year period. You're better off investing it in a money market or even an investment checking account that some of those brokers give out nowadays.
tl;dr - Don't put your money into CDs right now, or for the forseeable future.