Basic savings accounts are useful for preserving some cash in a rainy day fund. Because you can usually move funds quickly to your checking account, they are convenient to cover unexpected expenses. However, savings accounts do have some drawbacks and limitations, especially if you have extra money you could invest elsewhere.
A main drawback of a basic savings account is a limited interest yield. Typical savings funds earn well below 1 percent in interest. This is the tradeoff for the high level of safety, security and easy access they offer. These accounts are not the best place to grow your wealth if you have more money to invest beyond your short-term emergency needs.
Another limitation of savings accounts is standard regulatory requirements on the number of withdrawal transactions you can do per month. Basic savings accounts usually allow up to six transfers in a month. This is to prevent people from pocketing higher yields than they get on checking accounts while treating the accounts like a regular use checking account. These limits are not a major concern unless you get in the habit of routinely using savings to cover your unexpected expenses or impulse buys not in your budget.
Minimum Balance Requirements
Savings accounts usually have minimum initial deposit and average balance requirements tied to interest yields. You can often get accounts with no deposit and no minimum balance requirements, but yields are miniscule and you usually pay monthly account fees between $5 to $10. Higher yield or no fee accounts often have initial deposit and average balance requirements from $100 to $500. The increased interest at higher levels is not commonly significant enough to justify treating a basic savings account as an investment. However, it is a slight benefit if you maintain more money in your rainy day fund.
From a financial management perspective, a flaw of savings accounts is the missed opportunity to potentially earn more from other investments. Once you set aside several months of cash reserves, it is often better to put your extra money into stocks, bonds or other higher yield investments. Naturally, higher rewards usually carry higher risks of loss. Credit card balances are another consideration. If you have a high interest credit card balance, keeping extra money in a low yield savings account makes little sense. You are better off paying off the card balance to save on interest.
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