What’s the point of a savings account, really? With interest rates so low it’s easy to think that there’s no point in having a savings account anymore. After all, you’re going to earn almost zero interest.
Any interest you do earn won’t help your savings keep up with inflation so in reality almost all savings accounts lose you money at the moment. There doesn’t seem to be any high interest options out there that match inflation, never mind beat it!
So it’s easy to see why people think there is no point saving money on a regular basis and certainly not bother with having a savings account.
So really, what exactly is the point of having a savings account when it’s effectively losing you money?
Well for starters, one of the most valuable benefits of savings accounts is that they provides you with stability and flexibility should you have a need to access some cash fast in an emergency.
You might lose a few pounds in the value of your cash due to inflation but you’re not risking your money on the stock market. Your cash lump sum is protected such that you can always access it (according to the terms of your specific savings account).
When emergencies happen, they are well, emergencies. And emergencies can’t wait while you talk to your stock broker about which stocks to sell in order to get some cash.
what is a savings account?
Savings accounts are a place to store money you don’t need or plan on using right away. They can be used to store your emergency fund, or they could help you save up before buying something big like your first home!
In essence, a savings account is like your own personal piggy bank. It’s the perfect place to put away money for emergencies and create peace of mind in your financial life.
What’s the purpose of a savings account?
The purpose of a savings account is to hold your hard earned money in an easily accessible and safe place. Unlike your main checking account, all of your cash is safely tucked away and you can’t spend from the account directly.
Savings accounts do not have debit cards. This restriction on accessing your own money can help restrict spending impulses and gives you more chance of building up a solid sum of money.
Spoiler: The purpose of a savings account isn’t to build wealth and make you rich. Savings accounts offer very low interest. Long term your money will lose value sat in these accounts.
Is it important to have a savings account?
You might be thinking that if it’s purpose isn’t to build wealth then is actually worth having a savings account? In fact, having one is one of the best ways you can safeguard your investments and protect yourself from any unforeseen financial emergencies.
If you have all your funds invested and need some cash quick, it could take time to sell them off. Leaving you vulnerable just when you need money the most!
Saving money is important for both your current self and your future self. They both need a slice of your money!
How does a savings account work?
A savings account is completely separate from your main bank account. You don’t have a debit card attached to a savings account and most of the time you cannot withdraw cash from one using an ATM/cash machine.
A savings accounts works by paying you a small amount of interest on the balance in your account in return for you keeping your money there. What this means is that every year, your bank will pay you $x for keeping x dollars in their savings account.
The rate of interest can change from time to time and some accounts will pay a tiny bit more interest if you agree to lock your money away for a set amount of time.
For example, a couple of months ago I opened a new fixed rate savings account. My money is locked away for 2 years. In return for not withdrawing any of my own money, the bank will pay me a bit more interest. Still doesn’t beat inflation though, sigh!
The disadvantages of saving accounts
What’s the point in having a savings account if it doesn’t really make your money grow? Interest rates are low so you are potentially losing money over the longer term and that is the main and biggest disadvantage.
Many savings accounts are easy access and that can be a disadvantage as it’s all too tempting to dip into your savings. You might promise yourself you’ll replace it with your next paycheck, but it doesn’t always happen.
The biggest advantage to a savings account is that any emergency withdrawals will take less time than selling any stock market investments.
Let me explain why it really is worth your while opening a savings account (or two) even with low interest rates.
The advantages of savings accounts: why you needs them
1. You need to get organized
You’ll never be wealthy if you are disorganized. Separating out your savings into separate named accounts helps you see your money and know where you are at.
2. you need to see your cash growing
We all feel the excitement when we see our money growing and it’s a good feeling. Remember, you can’t spend your savings account directly so seeing this happen really is pretty satisfying!
If you can’t see the balance of your savings go up then it’s all too easy to think you aren’t saving very much. You’re more likely to give up when it feels like you’re making no progress.
3. ring fence your emergency money
What’s the point of having an emergency fund if you can’t access it in case of any unforeseen financial emergencies?
It is important to have a well-thought out plan for your money that includes how much cash you want to set aside in case of a financial emergency. What good does it do if your entire life savings is invested when disaster strikes?
It’s better to have some cash set aside, just in case something happens, this way you will be much more prepared for any fallout.
4. Focus on financial goals
You need to be able to plan for the future and have a savings account will help you do this.
What’s your goal? Buying a house, a new car or starting up your own business? A savings account gets you started on the saving path and is ideal for your short term financial goals.
Remember, many financial experts say you shouldn’t put money in the stock market unless you can leave it there for at least 5 years. Hence, not a place for your short term goals.
4 really good reasons you should open a savings account
Children are expensive. They need clothes, toys and activities, sometimes all at the same time! A savings account is a great way to even out the cost of bringing up your own children as it can be difficult to budget with all these expenses coming at once!
Create a sinking fund for your kids and save a set amount each month. You can then dip into this savings account as and when your get a child-related expense poppping up.
It’s difficult to think about saving for a car when you think you can’t even afford the down payment. A new car can be really expensive and a savings account is the perfect way to start saving for this.
Saving regularly, your money will grow over time and one day soon you’ll be able to afford a new (to you) car without breaking the bank! Because of course, you’re not thinking of buying a brand new car are you?!
The cost of buying your own home is pretty steep these days and you need a big deposit. Plus there are extra costs, legal fees etc that you need to save for.
A savings account is a good place to start building up these savings. Putting money aside with every paycheck is the easiest way.
If you are already a homeowner, you still need to save. Homes cost money to maintain and you will find yourself needing to do repairs and other maintenance. Roofs don’t last forever, boilers and furnaces need replacing eventually and expensive things break.
A savings account is the perfect way to have funds set aside for the little unexpected expenses that can end up costing a lot!
4. FU money
Not to be confused with financial independence. F*** You money is an amount of money you have squirrelled away that means if you had to, you could literally say FU to your boss and walk out of your job. Apologies for the language!
Not something I would encourage you to do of course! But having this money means you can get out of a crap employment situation and have the breathing space to find something better.
This money, like emergency money, needs to be fairly easy to access. Perhaps not within a couple of hours. But if you have a boss from hell, you don’t want to have to wait until the stock market recovers to resign.
Related post: 9 Financial Wellness Tips For Success
Understanding the advantages of savings accounts
Saving money is one of the best things you can do for yourself and your family. The whole point of having a savings account is to set aside some cash in case something goes wrong and to protect these savings from the volatility of the stock market.
Savings accounts offer very low interest rates these days which means they don’t make much sense as an investment strategy. But there are still plenty of reasons why it’s worth having one!
Start taking back control of your money by grabbing your copy of the Money Saving Starter Guide today.
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Last Updated on 13th September 2021 by Emma