The Disadvantages of Saving Accounts

Banks often package basic checking and savings accounts together.

Banks often package basic checking and savings accounts together.

Savings accounts are bank accounts that allow you to hold money and earn some interest, but also have access to the money in the event you need cash in a pinch. Savings accounts aren’t invested in the market, so the value won’t go down, and the accounts are covered by the Federal Deposit Insurance Corporation, so the first $250,000 is protected even if the bank goes out of business. Though savings accounts definitely have their place in your financial plans, such as holding the money in your emergency fund, holding all your money in a savings account probably isn’t your best option because of the disadvantages of savings accounts.

Low Rates of Return

Savings accounts will typically pay more interest than checking accounts, but not as high a rate of return as you can achieve in other types of accounts. As of March 26, 2018, the average interest rate across the country is 0.82 percent. For example, if you have money that you know you won’t need for a certain period of time, you can usually attain a higher interest rate on a certificate of deposit. Or, for money that you want to grow over the long term, investing in stocks, bonds, mutual funds and ETFs can provide a higher rate of return, albeit with some additional risk. This makes savings accounts a great place to save your safe money – money you can’t afford to lose – but not a great place for money you want to grow over the long term.

Withdrawal Restrictions

Savings accounts aren’t as flexible when it comes to moving money as checking accounts. You can deposit money in a savings account as often as you want, but federal banking regulations restrict you to six pre-authorized, automated, or telephone transfers or withdraws during any given month. But, it’s not all bad news: you can perform as many transactions or withdrawals as you want as long as they are in person, ATM or by mail. You can also do as many transfers as you want to pay a loan at the same bank.

Fees and Minimum Balance Requirements

Some savings accounts have monthly fees or minimum balance requirements that you must meet to avoid monthly fees. If your balance doesn’t stay above the required levels, the bank may charge fees that could make it quite costly for you to have the savings account open. Look for banks that offer savings accounts with no minimum balance requirements to avoid this disadvantage.

 

About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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