You may remember a wise adult telling your younger self “don’t spend all your money!” or “save it for a rainy day!”
That’s good advice. Unfortunately, many Americans ignore it. According to MagnifyMoney, “29 percent of households have less than $1,000 in savings
(Horymski 2018) .” Ouch.
In a world where no one ever loses a job or is injured, this is probably not a big deal. But let’s face it: we don’t live in that world. People have unexpected hospital stays, car accidents, failed appliances, and friends and family in need. In such a financial environment, having no savings account is risky – even dangerous.
What is a savings account?
A savings account is a special kind of bank account dedicated to storing your money. In contrast to a checking account, a savings account is intended to hold – and keep – your money for a period of time. Sure. A checking account will hold your money just fine, but a savings account is dedicated for this purpose.
Why do you need a savings account?
Ok. But maybe you’re not convinced. Maybe you’re happy with your standard checking account. That’s fine if you are, but you’re leaving a few great benefits on the table.
Depending on the bank and options you choose, your savings account can earn you money. As a reward for keeping your money in the bank, your bank will gift you a percentage of your balance. This means that as long as you keep money in the account, it’s earning more money for you.
Now, you’re not going to get rich doing this, of course. But it’s a nice perk.
Money is set aside
A checking account is meant to be used. You’re constantly adding money to and taking money out of a checking account. Use it to buy gas, get lunch, pay your bills. A saving account is meant to sit and not be touched.
Separating your spending (checking) account and savings account creates a mental division between the two funds. Yes, both accounts have your money, and yes you can spend the contents of either at any time. But that’s the wrong mindset.
Use your checking account any time you want. But add to your savings account and leave the money there. This money is taken out of your checking account so you don’t see it, and you’ll be less likely to spend it.
If you’re like me – an impulse shopper – hiding my money from myself is a good thing. I can still get to it if I need it. But I’m not going to check my account balance and think “Ooh hey. I have money! What can I buy?”
Life is unpredictable. People lose jobs, get hurt, crash cars, break appliances. Life happens. What happens if you don’t have a backup?
Imagine, if you will, you have $381 in your bank account. No savings. About $12K in credit card debt. Pretty typical.
You’re driving home from work one sunny afternoon and total your car. Insurance will cover it, right? Wrong. You only have liability coverage. No check for you. Great.
You have to have a car to get to work, but you don’t have enough to buy a replacement. What do you do? Take out a loan? Use a credit card? Ouch.
If you had a backup fund, you wouldn’t need to go further in debt. You could simply transfer what you needed from savings and pay cash.
You know you want to replace that noisy washing machine or buy a new car. You don’t have the cash right now, but you’ll save up for it – so you tell yourself. Your paycheck hits, but you find yourself spending most of your money – not on bills, just little things here and there. Little unnecessary expenses.
Instead, consider disciplining yourself into putting what you don’t need into your savings account. If the money isn’t visible to you in your checking account, you may be less likely to spend it on those impulse buys. Over time, what you’ve saved will add up so you can drop a wad of cash on that big ticket item and leave the plastic at home.
Should you open a savings account?
So, should you open a savings account or should you stick with a normal checking account? Obviously I’m not a financial adviser, so please don’t take my word for it.
However, I strongly advise looking into the possibility. Savings accounts offer a level of financial stability that many other accounts simply don’t. They encourage healthy financial habits and can help you grow your wealth.
What’s not to like?
If you have questions about your options, meet with a professional at your bank or your personal financial adviser. A professional can walk you through the pros and cons and help you decide what is best for you.
Horymski, Chris. “How Much Does the Average American Have in Savings?” MagnifyMoney, 29 Aug. 2018, www.magnifymoney.com/blog/news/average-american-savings/.