Saving is a productive habit, and one that most children are taught with their first piggy bank. In the current economy, however, some people might be wondering, “Should I open a savings account?” particularly when interest rates are so low.
A GOBankingRates survey found some alarming results concerning Americans’ saving habits. Although just over 50 percent of those surveyed had some savings account balance, 62 percent had less than $1,000 in a savings account, and only 29 percent had over $1,000 put aside for emergencies.
Almost 30 percent of those surveyed said that they had $0 in a savings account. Of those who had a savings account, only 14.2 percent had a balance of $10,000 or more. Here are some reasons why you should open a savings account, or at least hold on to that piggy bank.
1. Life Happens
Life has its ups and downs, and some of the downs are expensive. Having savings that you can fall back on when you need them provides a sense of security and could mean the difference between weathering a crisis or going into bankruptcy.
“Having just your paycheck alone to live off of is terrifying,” said Heather Garriock, a mortgage agent with The Mortgage Group. “Anything can happen! Car accident, leaky roof, your kid gets hurt playing a sport.”
“Having some savings for those emergency times is crucial so that it doesn’t set you back,” she said. “Even a simple interest savings account from your bank is better than nothing. The rewards aren’t going to be big, but you will have access to that small chunk of money when you need it.”
Garriock also recommended opening a tax-free savings account (TFSA), or a Roth IRA, which is the equivalent of the Canadian TFSA. “It’s free and oftentimes harder to access on a daily basis, so it becomes harder to dip into,” Garriock said. “This also encourages people to open up another savings account that is more accessible. Now you’ve got two savings accounts, one immediate and one long term.”
2. Get Control Over Your Finances
Maintaining a savings account takes discipline and can help you become more aware of your financial situation. People who proactively manage their finances tend to be financially healthier and more likely to live within their means.
“People with savings, from a client perspective, generally tend to have a better handle on their life situations and financing,” said Garriock. “Most of them have a plan as well to pay off their mortgage.”
3. It’s Cheaper Than Borrowing
The alternative to dipping into savings when you need cash is to borrow. But this can be costly. According to Mark Kantrowitz, an expert on student aid, “If you were to save $200 a month for 10 years at 6.8 percent interest, you’d accumulate a total of $34,433.”
“If, instead of saving this amount, you were to borrow it and pay it back monthly over 10 years at 6.8 percent interest, you’d pay $396 a month, almost twice as much,” he said.
It’s important to note that, while the above example is meant to help compare costs of saving versus borrowing, Kantrowitz said that a 6.8 percent interest rate could be possible with a long-term approach to savings.
“Using an age-based asset allocation that starts at 100 percent stocks and bottoms out at 20 percent stocks, with a 12 percent average annual return on an all-stock fund and 2 percent average annual return on an investment with little or no risk of loss to principal, the average annual return over 17 years will be about 6.8 percent,” he said.
4. Weather Economic Downturns
Having a savings account can help you weather either a downturn experienced by your employer or an economic slowdown on a larger scale. You might experience a layoff and need a cushion until you have a steady income again.
According to Kantrowitz, “The average duration of unemployment, even during the most recent economic downturn, was five months. So, by saving six months’ salary in a savings account, you have enough money to handle short-term unemployment or other emergencies.”
5. Pay for College Education
The average 2015 graduate carries a debt of $35,000 in student loans, according to an analysis by Kantrowitz mentioned in The Wall Street Journal. More worrisome is that many parents are still paying off their own student loans when their kids are going off to college, according to an analysis by the Associated Press.
FinAid.org reported that the cost of tuition could be more than three times the cost it is today by the time today’s newborns go to college. With this in mind, Kantrowitz recommended a college savings plan for parents.
“Not only is it a tax-advantaged way of saving for college, but it also gives you the flexibility to choose a more expensive college that might be a better academic fit,” he said.
6. Avoid Sliding Into Debt
With no accumulated savings, an unexpected expense such as a home repair, a medical emergency or a disability can force you to go into debt to meet expenses.
Mike Chadwick, an investment advisor with Chadwick Financial Advisors, warned that if you don’t have any savings, “You’re going to end up in debt with credit cards, loans from family or some other source, and it’s a slippery downhill slide if you’re not disciplined to always save some of your earnings.”
“Not having any savings, and slowly sliding into debt, is how most financial problems begin,” he said. “It’s very much like a person ‘just trying’ drugs; it often leads to a much bigger problem longer term,” he added.
7. Gain Financial Flexibility and Options
Saving can bring a little luxury into your life, not just provide funds for the financially challenging times. “Savings accounts are a critical piece of any sound financial plan,” said Daniel Zajac, a certified financial planner with Simone Zajac Wealth Management Group. “A sound savings account can give you options during times of need and during times of want.”
A separate savings account can allow you to buy otherwise unobtainable items if you tend to spend up to your available checking account balance. “Savings accounts can also be used as a mechanism to save for short-term goals: a vacation, a down payment on a new home or a college expense that is coming due,” he said.
8. Maintain Your Capital and Its Value
Savings account interest rates are currently low but, according to Zajac, “With savings accounts, the goal typically isn’t to earn a good rate of return. The goal should be preservation of capital. Said another way, don’t lose any value.”
To deal with an uncertain stock market, balance is the key to surviving periodic crashes, according to personal finance blog A Wealth of Common Sense. A steady savings account or creating a conservative portfolio can help your capital keep its value through a bear market. A broad portfolio that contains a mix of stocks, bonds and other investments can be a safer way to save without risk.
Why Your Savings Should Be Earning Compound Interest
9. Out of Sight, Out of Mind
Avoiding spending all of your income is easier if your savings are set aside before you have a chance to spend. Andrea Woroch, a nationally recognized consumer finance expert, recommended separating your savings account so that it is not linked to your checking account.
According to Woroch, with a separate savings account, “You can’t easily transfer funds online or withdraw from the ATM. Keeping your savings separate ensures you have less access to them and will help you learn to live on what you have in your checking account. After all, what’s out of sight is out of mind, so you won’t be tempted to dip in when your checking balance is low.”
10. Reach Short- and Long-Term Goals
Saving should have a purpose. A savings account could be an emergency fund, but you can also maintain a fund for a new car, a house or another desired objective. The psychological and motivational benefits of achieving a goal can improve your life-management abilities and outlook.
According to Woroch, savings accounts help you to “realize your progress and efforts and ultimately evaluate your ability to afford those various needs or desires.” A benefit of saving is to get money back on what you save. “Opening an online savings account with an FDIC-insured online bank assures you make something back on the money you put away,” said Woroch.
To find that elusive high-interest savings account, debt expert and financial attorney Leslie Tayne also suggested that you “look into online savings accounts, which generally offer better interest rates than brick-and-mortar locations.”
Establish a savings account that is separate from your day-to-day cash sources. You can benefit from improved financial health, better control of your life, a sense of accomplishment and, most importantly, reduced risk of financial hardship.