Importance of a Fully Stocked Savings Fund
Think of your checking and savings account like the freezer and fridge in your home. The fridge is for fresh foods that you’ll eat more frequently and can be compared to recurring charges and expenses. The freezer is for holding items that last longer and are at your convenience when you don’t have anything ready for dinner or you need a sweet treat! The freezer is for last-minute unexpected expenses or large purchases that you may not be prepared for. Without a savings account, you are leaving yourself open and vulnerable to debt and overspending. As a responsible consumer, your goal should be to create a “fully stocked” emergency fund that can cover at least 3-6 months’ worth of expenses. With this stocked fund, you can protect yourself if you lose your job or you have a sudden medical expense that you can’t afford to pay for upfront.
Benefits of Having a Savings Account
As mentioned above, a savings account is an emergency fund that acts as a safety net when times get tough. However, the benefits of this type of bank account do not stop and start with a fund for financial emergencies. Here are a just few of the many advantages of building up a savings fund:
The Power of Interest
Choosing a high-yield savings account means that your money can grow! The national average for a savings account is less than 1%, but some high-yield savings accounts can be 4.5% or more. While you won’t have the potential to earn as much as you would through a money mutual fund or the stock market, you can grow your money more than you would through a savings account than a regular checking account.
FDIC Insured
If your bank is FDIC-insured, the money in your savings account is automatically insured for up to $250,000. This provides a peace of mind that you won’t have with other types of investments that can typically be more volatile – and yes, savings accounts are considered to be investments! Other investments can cause you to lose money over the years. You’re not guaranteed any return on investment when choosing to put your money in commodities or other stocks on the market.
Doesn’t Require a Big Initial Investment
You don’t need to put up thousands of dollars to open a savings account, but keep in mind that some banks have minimum balance requirements that typically range from $300-$500. If your money drops below the minimum balance requirement, you may be charged a weekly or monthly fee until the balance increases appropriately.
Why Should I Automate My Savings?
It’s no secret that many Americans struggle to save money. According to Forbes, one in four Americans has less than $1,000 in savings and may be unable to handle unexpected expenses like medical bills or car repairs. It’s easy to say that automating your savings is easy, but seeing the $50 or $100 disappear from every paycheck can be tough – especially if you are struggling to make ends meet.
By automating your savings each paycheck, you can create a cushion to get you through tough times and slowly build your emergency fund over the course of several months. Automating your savings is as simple as connecting your banking app with your direct deposit at work and authorizing a portion of your paycheck to be sent to your savings account. This can typically be done online through your bank’s website, or you can set it up in person at a local bank branch. Here are a few different tips to help you build your account:
- Don’t Be Afraid to Do it Manually: If you don’t want to completely automate your savings, then just do it manually! Manually taking money out of your paycheck at an ATM every two weeks can help you control how much you are taking out, so you aren’t stuck with the same budget every month. This method allows you to have a little bit of wiggle room if you live paycheck to paycheck.
- Choose a High-Yield Savings Account: If you are going to invest in a savings account, get the most bang for your buck and choose a high-yield savings account with compounding interest.
- Cut Your Spending Down and Set a Solid Budget: Even if you have a savings account in the works, you should focus on cutting out unnecessary spending and putting a budget plan in place if you don’t have one already. Take a closer look at your current expenses, including your bills, subscriptions, and payments on online installment loans. See where you can cut back and create a stronger budget going forward! Remember that stricter budgets tend to lead to overspending, so give yourself a little bit of leniency with sweet treats. You don’t need to cut everything out, but if you want to save more, then you have to prioritize a little bit of frugality.
How Do I Choose a High-Yield Savings Account?
Choosing a high-yield savings account can seem intimidating, especially if the terms on the bank’s website are throwing you off, such as APYs or compound interest. APY stands for Annual Percentage Yield, which is the interest rate your account earns per year, including compounded interest. Most high-yield savings accounts offer 4.5-5.5% interest rates, which are ideal for this type of investment. Some accounts can be as high as 6%, but these are a little bit more rare in comparison to other accounts. Compounded interest will be calculated on both the principal amount invested and the accumulated interest. The more you invest, the more you can see your money grow! Now that you understand the terms surrounding this type of savings account, make sure to shop around and find the option that works best for you! Remember to automate your savings in order to get the most out of your investment. Some high-yield savings accounts will allow you to have access through an ATM because it’s linked to your checking account. If accessibility is important, make sure to check off that box when you sign up for a new savings account!
But at the end of the day, the smartest thing you can do is invest in yourself and make your money work for you. It’s important to have a savings account so you aren’t financially vulnerable!