Weaknesses & Strengths of a Savings Account

A savings account can be an excellent place to stash your short-term money. If you have cash you cannot afford to lose, keeping it in a savings account is an excellent way to protect your funds while earning a competitive rate of interest at the same time.

Safety

Savings accounts are safe, and that is certainly an important consideration. If you choose a bank that is a member of the FDIC or a credit union that is a member of the NCUA, you can be sure your money is protected. As of 2011, the money in a savings account is protected up to a limit of $250,000 per account. That protection remains in place even if the bank or credit union goes out of business or is taken over by the government.

Access to Funds

When you have a savings account, you can access your money whenever you need to. That makes a savings account an excellent vehicle for building an emergency fund you can draw on if you lose your job or suffer a financial setback. On the other hand, if you invest money in a CD, you must keep it invested for the entire term or pay a penalty for early withdrawal.

Low Yield

One big disadvantage of a savings account is that the yields tend to be very low. Interest rates on other safe vehicles, including many government bonds, certificates of deposit and money market accounts, are often higher than what you can get in a savings account. If you are looking for a higher return on your savings, it is worthwhile to look at other opportunities, like CDs and money funds, instead of simply putting all your extra money into a savings account.

Inflation

The low yield you receive on a savings account means that over the long run, you might not be able to keep up with the rate of inflation. If long-term inflation averages 3 percent and your savings account pays only 1.5 percent, you are essentially losing purchasing power every year. Once strategy is to keep your short-term money in a savings account, but invest your longer term money in vehicles that offer a better opportunity for growth, like stocks, bonds and mutual funds.

Fees and Minimums

Savings accounts often have minimum balance requirements, and many have monthly account fees, as well. Shopping around can help you find the account with the best terms and conditions,and watching your balance closely can help you avoid any service fees that kick in when your balance gets too low. Since yields on savings accounts tend to be quite low, even a modest fee can eat into the principal on the account.

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