Are you wondering if you should have a savings account?
Whether you’re budgeting, working a side hustle, cutting expenses, or getting out of debt, the ultimate goal is to increase the amount of money you can put toward savings and investments. But before you do that, it’s important to establish a safe, and reliable place where you can keep your money. And that’s where savings accounts shine.
That said, in the digital world we live in, there are quite a few people out there with very negative opinions about savings accounts. So, if you are a little confused on whether or not you should have one, I can understand why. In fact, before we go much further, allow me to answer the question that likely led you to this post in the first place: why should I have a savings account?
In short, you should have a savings account because it can help you:
- Prepare For Emergencies
- Keep Your Money Safe And Secure
- Reduce Your Temptation To Spend
- Improve Your Financial Organization
- Avoid Debt
- Maintain Liquidity
- Protect Your Assets
Now, since that was a pretty brief overview, in the rest of this article, I am going to take a deeper dive into all 7 of those reasons. So, if you still aren’t sure if you should have a savings account, keep reading.
1. Prepare For Emergencies
One of the main pillars in sound personal finance, is preparing your financial life for emergencies. No matter who you are, how much money you make, or your social status, nobody is immune to emergencies, and therefore, you should prepare for them.
Some people call this an ‘emergency fund’, while others call it a ‘rainy day fund’. But regardless of what you call it, a savings account is one of the best places to keep the money you set aside for emergencies.
You see, unlike a checking account, you can’t just swipe your debit card and spend money from your savings. Sure, you can pay bills and make purchases through the use of ACH checks, but in general, the money is less accessible for spending. And that means that should a moment ever arise in which you need to pull money out of savings to pay for an emergency, it is more likely to be there waiting for you in your time of need. And that’s the whole point, right?
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2. Keep Your Money Safe
One of the biggest benefits of keeping your money in a savings account, is that your money will be insured. Whether your savings account is with a bank that is insured by the FDIC, or a credit union that is insured by the NCUA, your money will be protected in the event of fraudulent charges or withdrawals.
Now, just to be clear, any money you keep with a bank or credit union, whether it’s in a savings account, checking account, or money market, will be protected by insurance. So, any of them are more secure than keeping your savings at home.
I mean, if you were to keep your savings stuffed in your sock drawer at home, and someone were to steal it, you would have little chance of getting it back. Is that something you are really willing to risk?
3. Reduce Your Temptation To Spend
It’s a crazy concept, but savings accounts are actually designed to help you save money. Weird, right?
While a checking account is meant to hold money you want available for spending, a savings account is more restricted. And since you can’t just swipe a card and buy something with the money you have in savings, you are less likely to spend it.
Think of it like this. If you have a classic car sitting in your garage, every time you walk out into your garage, you will be tempted to hop in and drive it around town. Whereas, if you were to keep your car in a storage facility a mile down the road, then you would remove a lot of that temptation and probably drive it less frequently.
Well, the car in your garage is like your checking account. It’s always right there, tempting you to spend it. Your savings account, on the other hand, is like a storage unit. You can still get to the money without much trouble, but it adds a layer of inconvenience that makes you less likely to spend it.
4. Improve Your Financial Organization
If you want to organize your financial life, one of the best things you can do is separate your money into different buckets. Now, on a basic level if you have a checking account and a savings account, you have a spending bucket and a savings bucket. But, like organizing any other area of your financial life, the more buckets you have, and the more clearly you define what goes in those buckets, the easier it will be to maintain order.
That’s why I recommend setting up multiple savings accounts; each with a defined purpose.
For example, your emergency fund should only contain money that you’ve dedicated to paying for emergencies. Beyond that, you could have an automotive fund that can help you pay for car repairs, maintenance, and even a better car down the road. Or, you could have a home fund, where you save for remodels, home repairs, and seasonal expenses.
With how easy it is to set up a savings account, there’s no reason your savings should be disorganized.
You should have a savings account for every purpose. And for every purpose, you should have a savings account.
5. Help You Avoid Debt
I talk about the negative financial effects of debt a lot on this blog, and I’m not going to stop now. If you have big plans for your financial future, you need to avoid debt at every turn. That means no credit card debt, no auto loans, paying off your mortgage (or even better, paying cash for your house), and I’m begging you… no payday loans!
Now, the thing about living completely debt-free, is that it requires you to save and pay cash for everything you want to buy; big or small. And having a savings account (or a few savings accounts) is the first step in this process.
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6. Maintain Liquidity
Liquidity is basically just a measure of how quickly and easily you can get access to your money so that it is available to spend. For example, the money in your checking account is about as liquid as it gets, because in order to use it you just have to swipe your debit card.
On the other hand, the equity you have in your house, is about the least liquid asset you have, because in order to get access to that money, you would need to sell your house.
Well, the money you keep in a savings account, though slightly less accessible than the money in your checking account, is still very accessible. So, in the event that you needed to use the money, it is very convenient.
7. Protect Your Assets
If you have any financial assets, from equity in your house to the money you have sitting in your 401K, the best thing you can do is to let your investments grow. The worst thing you can do is pull money from them to pay for other expenses. And that’s exactly why having a savings account, or, once again, a few savings accounts, is so important.
You see, the more money you have in savings, the more your assets are protected from a financial emergency in your life.
For instance, if you were to lose your job without any savings piled up, then you might be forced to sell your house or dip into your retirement fund to pay for your living expenses. On the other hand, if you were to have six months of savings just sitting in your savings account, you could pay for all your expenses while you looked for a new job, without ever harming your assets.
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