Is a Savings Account a Worthy Investment?

In order to cover unexpected retirement costs and overall financial goals, you’ll need to build a savings nest egg. Most people don’t want to work past normal retirement age, rely on children for financial help or go back to work after retirement. Having a mix of assets from investments and other savings methods is how many people are preparing for retirement.

A savings account has been a traditional asset-saving instrument for Americans over the decades, but is it worth having one in the 21st century? Only you can answer that question, as different people have different methods of managing their money. This Q&A can help you decide what makes the most sense for your unique situation.

What is a savings account?

A savings account is an account used to deposit money at a bank or credit union and earn interest on the account over time. The purpose of the account is for saving money that you want to have good access to but you don’t need for daily expenses. A savings account is often used as a direct-deposit tool to accumulate funds over time, but the low interest rate means you won’t be growing your money substantially over time.

Savings accounts are simple, safe accounts. They are considered very conservative and are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) for up to $250,000 per owner.

Is it worth having a savings account today since interest rates are low?

Savings interest rates are pretty low compared to other investment alternatives, so it really depends on your situation. The average savings account has a 0.06% API, and many of the nation’s biggest banks pay rates as low as 0.01%. Some banks offer higher interest rates if you deposit larger balances, so it pays to shop around or do your homework. For example, Bank of America offers three different types of savings accounts with different monthly fees, minimum balances and interest rates — which is pretty standard across many institutions. Some accounts pay yields closer to 1%, which may not sound like a lot, but when you’re dealing with thousands of dollars, the interest can accumulate to hundreds of dollars each year, compared to dollars.

Some banks offer teaser rates, but they can be deceiving. For example, an institution may offer a high introductory rate of 2.25% on their online money market accounts. However, after the first three months, the rate drops to 0.75%. While savings accounts offer security for your funds as well as greater liquidity, they also come with significant costs. In exchange for the freedom to pull funds out on a whim, savings accounts can burden consumers with low return rates, hidden fees and surprise penalties.

It’s also important to keep in mind that since savings accounts are conservative, it’s important to balance a savings account with investments that produce more return over time. An expert financial advisor can help you determine what mix is right for your investment portfolio.

Is there a minimum balance for a savings account?

Typically, there is a minimum balance of $25 or more for individual savings accounts. Some banks offer higher interest rates if the minimum balance is higher. For example, with a minimum $10,000 deposit, some banks offer an APY of 1 percent; but there is typically a monthly fee if the balance falls under a certain dollar amount. Different banks have different minimum balances and requirements, so it’s important to do your research. Online accounts typically offer the highest rates because banks are able to cut costs on branches and tellers.

How do I start earning interest on a savings account?

Interest begins to accrue on the day the account is processed, not the day the application is submitted. The application will be processed at the interest rate that was effective on the day that the application was submitted.

Are there fees on savings accounts?

Some banks charge simply for opening a savings account. If you have a low balance, a $25 annual fee and a monthly minimum-balance charge ranging from $4 to $10 can also suck up your savings. For consumers with low savings of $500 or less, an annual fee combined with repeated minimum balance charges can cut their savings in half in less than one year — so it’s important to only open or keep a savings account if it’s working in your favor. Every bank has different fees and penalties, so it’s important to do your homework.

Is a savings account right for you?

A savings account is not right for everyone, so if you’re unsure whether to transfer money each paycheck into a savings account, you may want to reach out to an expert financial advisor for direction. For example, if you’re approaching retirement and have reached your maximum contribution limits in other retirement accounts, such as a 401(k) or IRA — but still have funds left over to possible invest or save — it may make sense to do a direct deposit into a savings account with a good API.

Your financial planner can help you find out what savings rate makes sense for you to set aside each paycheck. According to experts, a baseline of 16 to 17 percent is generally a good starting point, but save as much as you can from each paycheck to have more to spend in retirement. Having a joint plan with your spouse is helpful so that together you can fill the gaps of retirement funds needed.

Should I balance my savings account with other investments?

Having a well-balanced portfolio helps set you up for success and a growth-oriented investment approach. Investing in many places, such as in Treasury bills, bonds, stocks or real estate, in addition to possibly a savings account, will help you maintain a steady income.

The point is that whatever age you plan to retire; whether you’re 62, 67, 70 or beyond, shifting out of savings mode is never a good idea. Contact a financial advisor or wealth manager to learn how you can achieve a well-balanced financial portfolio and continue to save and invest, even after retirement.

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