If you earn income, you should have a savings account, even if you do not have defined financial goals. Savings accounts can provide security and peace of mind, as well as serve as a resource in case of an emergency or a business opportunity. It may be overshadowed by the glamor of other investments, but a savings account is just as important, if not more so.
You never know when an emergency will occur. A car repair or broken major appliance can put a serious dent in your finances. And even if you have shored up your insurance coverage on all fronts, you probably still have deductibles. A car accident, serious illness or fire at your home can require sizable out-of-pocket expenses. Life can ruin the budgets of the most disciplined individuals, but a savings account can cover the gaps.
The returns associated with savings accounts historically have been lower than those of other investments, such as stocks, bonds and real estate. But tying up all your money in speculative or illiquid investments for the possibility of a higher return means you may be forced to sell at an inopportune time to take care of an unanticipated expense. Having a savings account can insulate your investment portfolio from loss through forced selling.
Peace of Mind
There is a certain emotional satisfaction in having a few thousand dollars in the bank. If you get laid off, if your business goes under, if your bread-winning spouse leaves, you'll have something to cover your bills for a while, giving you time to plan.
Having savings allows you to take advantage of potentially lucrative financial opportunities. If you stumble upon a once-in-a-lifetime business opportunity, you may lose out if you do not have adequate capital to invest.
Also, if you try to obtain credit with your bank for any reason, a robust savings account can enhance your prospects of success. A savings account can communicate stability and discipline to a loan representative.
The funds you deposit in a savings or money market account are secured by FDIC insurance. That means that even if your bank goes under, the government will replace your funds up to a certain amount. Cash can be lost, stolen or destroyed, and your life savings won't grow sitting in your safe. You earn at least some interest in a savings account.
Independence from Credit
Savings accounts allow you to meet your financial goals without using credit. When you buy something on credit, you pay for the privilege of being able to have the item immediately, even if you don't have the cash on hand to buy it. Amassing savings allows you to pay for some things you want without having to borrow money.
- The Importance of Saving Money
- The Importance of Saving and How Much To Set Aside
- Federal Reserve. "Regulation D: Reserve Requirements," Page 3. Accessed Sept. 3, 2020.
- Board of Governors of the Federal Reserve System. "Federal Reserve Board announces interim final rule to delete the six-per-month limit on convenient transfers from the "savings deposit" definition in Regulation D." Accessed Sept. 3, 2020.
- Internal Revenue Service. "About Form 1099-INT, Interest Income." Accessed Sept. 3, 2020.
- Federal Deposit Insurance Corporation. "Deposit Insurance." Accessed Sept. 3, 2020.
- National Credit Union Administration. "How Your Accounts Are Federally Insured." Accessed Sept. 3, 2020.
Christopher Hundley has worked as a writer since 2009. Residing in York, Pa., he has an MBA in information systems and a Master's degree in marketing, both from Baruch College, as well as a Bachelor's degree in English at Howard University.