With so many investments offering potentially greater rates of return, you might wonder why in the world you need a savings account. The bottom line is that any solid financial plan rests on a foundation of liquid assets, such as cash and the money in your checking account. Your checking account may handle your everyday expenses, but there are good reasons to have extra money in a savings account.
Safety Against Loss of Funds
The Federal Deposit Insurance Corporation insures up to a maximum of $250,000 in your bank savings account. If the bank fails, the FDIC covers your deposits. No one has ever lost money on FDIC-insured deposits.
Accessibility for Use
Funds in your savings account are readily accessible. You can make withdrawals from your savings account during regular business hours. Some banks may offer additional accessibility with an ATM card.
Preparation for Emergencies
Emergencies, such as losing your job, can cause stress on anyone's financial situation. Having several months' worth of living expenses in savings can help take the pressure off until you can get back on your feet.
Big Ticket Items
You might not have the resources to make a major purchase on the spur of the moment. By setting aside a fixed amount of money in a savings account each month toward the price of a big-ticket item, you will have the funds available to pay cash and avoid going into debt.
Cash for Unexpected Expenses
Life happens. You might have a tire blow out, or you might blow the engine in your car. Your sister might go into premature labor and you need to fly to Denver tonight. Unexpected expenses can put a huge damper on your financial plan; money set aside in a savings account can cover them.
Encourages Financial Stability
Pay yourself first. Regularly putting a portion of each paycheck into savings helps create a sense of financial stability.
Discourages Reckless Spending
It is easier to spend money that is in your pocket than to spend money that you have to get from the bank or the ATM. This "out of sight, out of mind" scenario may help discourage impulse buying.
Sets a Good Example
Putting money into a savings account at your local bank provides you with a teachable moment with your kids. Showing your kids how to save gives them an opportunity to learn self-control. Studies suggest that children who have savings accounts have less stress, a greater sense of hope and are more likely to attend college than kids who don't.
Encourages Sound Financial Habits
Regularly putting money into a savings account is a first step in creating habits that extend into other areas of your financial life. As you become more financially literate, you may discover the need to create a budget to tell you where you spend your money, and a financial plan to help guide you toward your goals for the future.
Earns Some Interest
Savings accounts pay interest on your deposits. Granted, the interest on savings accounts is minimal, but it is better than putting cash under your mattress where it earns nothing at all.