Do You Need a Savings Account? Pros & Cons to Consider

The year of great uncertainty, which was 2020, made it painfully clear that building up your savings is vitally important. Many people turned to investing trying to protect themselves and use the opportunity presented by the great stock market crash. However, stock and currency trading isn’t the route for everyone. Some people crave the stability and security of less risky methods of increasing their fortune.

Savings accounts offer one such opportunity. But before you put your hard-earned money into a bank, you need to understand what these accounts are capable of.

What Are Savings Accounts and How Much Money You Can Make With Them

A savings account is exactly what the name states. It’s a bank account where you deposit your money for “safekeeping”. This type of accounts will grow interest over time. Therefore, the money you aren’t using will make you more money while at a bank.

That sounds great and it is truly a good method to store money for specific purposes. For example, you can use it for an emergency fund or when directly saving money for a deposit or college.

That said, you need to understand that even high-yield savings accounts won’t grow your fortune overnight. At best, banks offer under 1% APY (Annual Percentage Yield) on their savings accounts. Digital challenger banks sometimes offer up to 2%. This is a good rate for long-term gain, but you can’t really use it to increase your savings significantly.

Also, don’t forget that the amount of money you put into your savings account is the most important factor. If you start with a very small amount, even in a few years the numbers won’t become impressive. However, if you make regular contributions and your money keeps earning your interest for decades, this can be a way to a good retirement.

When you consider savings accounts, it’s important to understand that they have some limitations. For example, you are often limited in whether you can withdraw money before the end of the contract. You might also be unable to withdraw more than a set amount. In addition, there are some associated fees, especially for transfers, that can be quite high. This includes overdraft transfers to a checking account.

Savings Accounts Pros: Safety for the Long-Term

The most important advantage of a savings account is that it protects your money. Even during times of recession, like the coronavirus crisis, your money is safe in a bank account where it’s FDIC insured.

Therefore, using this service is virtually a risk-free way to keep your money safe. In the meantime, your savings will continue to grow. This will be a slow going because the APY isn’t high and can change anytime. However, if you aren’t using the money, this method costs you nothing but gains steady interest.

Depending on the type of account, your money might remain easily accessible. Therefore, you will be able to use it whenever necessary. This again highlights how using a savings account is a risk-free method of safekeeping your funds.

Savings Accounts Cons: Your Money Isn’t Yours for a Time

Some savings accounts might have restrictions for withdrawals that will prevent you from using the money. This can be a risk if you use the account for your emergency fund, for example. In this case, withdrawing money might cost a penalty, which can be high.

Moreover, the gain, even with the highest yield accounts, isn’t very big. Therefore, if you want to use your money to increase your fortune, investing might be a better option.

Also, remember that APY might change so your interest rate can become lower over time. This type of account won’t protect you from the fluctuations in the FX market and weakening of the Dollar.

Finally, if you take a risk with online savings accounts, you might lose the money in case you aren’t careful. When choosing this route, be sure to verify the provider’s certifications. Only use services that offer FDIC insurance that guarantees your money is actually safe.

Bottom Line: Should You Use a High-Yield Savings Account in 2021?

In general, depositing your money into a high-yield savings account is a good strategy if you can afford it. It’s not a good method for growing your wealth in the long term. But if your goal is to protect a portion of your fortune and get some security, this method is for you.

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