What do Warren Buffet, Jay Leno, and Sarah Jessica Parker have in common? They all defy Parkinson’s Law that says the more money you make, the faster your expenses grow. Instead, the more money they make, the more they save. Warren Buffet is not only famous for his prowess in investing; he’s also respected for his discipline in saving. His motto, “Do not save what you have after spending. Instead, spend what you have after saving,” is a must mention in any personal finance seminar, books, blogs or any other publication.
On the other hand, Jay Leno from ‘The Tonight Show,’ banked all his money from the TV show and lived only on the income from his night gigs. He went on to build an empire worth over $300 million and own a collection of over 180 cars. Sarah Jessica Parker, on the other hand, is terrified of the idea of being broke. In an interview to the New York Times, she attributes her humble beginnings for her present spending and saving patterns.
Clearly, there’s a good reason why you too should have a savings account!
The idea of catapulting from humble beginnings to multi-millionaire status is enticing, might seem stretching but it’s clear, saving money has a direct effect on your financial fortune!
One of the best ways to cultivate a savings culture is by opening a savings account. Savings accounts are primarily bank accounts or accounts at the credit union that allow you to deposit money, keep it safe and withdraw it at certain intervals. Most institutions pay a modest interest on savings accounts. However, the interest rates vary, but, still, allow you to grow your money as you accumulate it.
If that sounds like a good reason to open one; below are more reasons why you should have a savings account.
1. Savings Accounts are Easy to Open and Cheap to Operate
Most traditional banks require just $25 to open a savings account. Several other institutions ask for no opening deposit at all. They’re not only ready to set up a savings account at no cost, but will also not ask for a minimum initial deposit. Especially the online banks, community banks and credit unions.
Opening a savings account is easy, you just need to pick a bank/credit union of choice, provide a government authenticated form of identification such as the driving license, Social Security Number, or military ID, and open the account online or in person. After opening, you can fund it with the minimum opening balance.
Moreover, savings accounts are really cheap to operate. In fact, most banks will waive the monthly charge of about $4 or $5 levied on checking accounts if you maintain a certain average monthly balance. Since the bank restricts the number of transactions and does not provide checks, it’s also a plus for you, there are minimal transaction fees.
2. Having a Savings Account Nurtures Good Financial Habits
If you already have a checking account, setting up a savings account at the same bank will not only be easy, but the bank will also allow you to set up free automated transfers from your checking account to your savings account. You can schedule such transfers at a frequency and amount that you are comfortable with. This way, you can build the nest egg without giving too much thought into it or being actively involved.
As you regularly put aside some money into a savings account, you’ll be taking the first steps in developing good financial habits. You’ll discover the benefits of working with budgets, tracking your expenditures, financial planning as well as the benefits of compound interest. An App like the Trim Financial Manager will go a long way in helping you become more prudent in your expenditure. But, the most important financial habit that you’ll pick up is saving.
Just by taking the step to open a savings account, you are more likely to save some of your earnings. Since savings accounts typically don’t have debit cards or checks, therefore, you are less likely to spend what is in the account. In addition, the bank restricts the frequency of withdrawal, thus helping to protect your nest egg from spending impulses.
3. A Safe Place to Keep and Access Your Money
We’ve seen how the best savings accounts are quick to open, easy to operate and set you up for good financial habits. But a more profound reason why you should have a savings account is the security it offers. A savings account is a safer place to stash your cash than a secret spot in the house or in some investment fund.
The fact that there’s no monthly fee to pay if you maintain a certain balance it simply means that someone will pay you when you keep your money with them. How cool is that?
It gets better, not only will the bank pay you to keep your money but the Federal Government, through the Federal Deposit Insurance Corporation, assures you of its safety, to a maximum of $ 250,000.
We all know the risks associated with keeping lots of money in our wallets or stashing it away it in some “secret place.” It could quickly get stolen or destroyed in a fire. But what’s interesting is that when push comes to shove, we are more likely to choose to hold on to what we have instead of risking it in a venture. Investment ventures such as stocks and bonds bear a risk element. Unlike a savings account, they don’t have the protection of the Federal Deposit Insurance Corporation.
If you, like many Americans, wouldn’t want to deal with the threat of losing your hard earned cash, for instance in a market downfall, the FDIC protection is a good reason why you should have a savings account.
4. An Easy Accrual Account
Keeping money in a safe place is a compelling reason why you should have a savings account. However, it’s not very often that we hear about a bank or credit union that went under. The last time there was such a crisis, the Federal Government came in with an elaborate bailout program along with even more stringent regulations to avert a similar crisis.
However, here’s a practical and everyday compelling reason to have a savings account. Use the savings account as an accrual account.
You can use your savings account to plan for and handle lump sum payments that are too big to fit into a one-month paycheck.
Payments such as motor vehicle insurance, homeowners insurance, and real estate taxes are made once every six months. Although services such as The Zebra and Metromile can help you to bring down insurance costs significantly, the final tab often exceeds what our monthly budgets can accommodate. Insurance companies are often more than happy to provide “solutions” to convert these payments into monthly installments. However, the “solution” comes at a hefty fee.
Instead of paying the fee to meet periodic expenses, you can put aside an amount each week or month in readiness for the payment. When it’s due, your savings account will enable you to make the payment without breaking a sweat and at no extra cost.
5. An Excellent Way to Save for Major Purchases and Vacations
Speaking of putting aside some cash for a purchase, are you planning to buy a house or a car soon? Have you thought about the down payment? If you haven’t, here’s a NEWS FLASH. Financers will seldom give you 100 percent funding on your venture. They’ll demand to see your commitment to the purchase and often this commitment is in the form of a 10 percent to 20 percent down payment.
A savings account is an excellent place to accumulate, store and grow your savings as you prepare for the major purchase.
Dan DeRose and Cady McGuire of Charleston S.C. discovered this secret. Drawing inspiration from the book Rich Dad, Poor Dad, they saved for over two years and eventually made a deposit of $ 46,000 for their home. It brought the cost of their mortgage down from $205,000 to $ 164,000. Because of the financial discipline they had developed when saving, they were able to pay off their house in less than five years. Also, they didn’t forego important events such as vacations!
Dan and Cady were able to go for vacations and make major purchases without getting into debt because they put off some of their weekly earnings in a savings account. According to Dan, they always put aside at least $ 600 each week no matter the circumstances.
If an interest-free vacation and having a ready deposit for your home are not a good enough reasons for you to have a saving account perhaps building a cash reserve will.
6. A Must Have Cash Reserve for an Emergency or Opportunity
Call it an emergency fund or opportunity fund, the idea of having some cash available to cater for the unforeseen is globally welcome. We may not know when an emergency will happen, but we are certain it will. Financial advisors often peg the figure at about six months’ worth of your expenses. That’s the amount you’ll use to keep yourself afloat if you come across a major expense, unforeseen circumstance or opportunity.
You could lose your job, or incur major medical expenses. In some cases, you could come across a one-off opportunity to buy something valuable at an unbelievable bargain. Whatever the scenario may be, having a savings account will help you build up a cash reserve to take care of those bumps and knocks, as well as take advantage of opportunities, we find in the path of life.
The point is, you don’t have to borrow money to take care of major expenses like a car or home repair. Instead, you can quickly turn to the savings account for funds.
Here’s the Bottom Line
Whenever you ask yourself, why have a savings account? You’ll come across several detractors and critics. But, it’s undeniable that we still need accounts that build our financial discipline, enables us to put aside some of our earnings and grow cash reserves without risking theft, market fluctuations while it still pays interests.
It’s a sure path that leads to your financial prosperity.