Savings accounts can be a good place to store extra cash in the short-term and earn a small return on your money. To learn the pros and cons of savings accounts, click here to jump to that section of the article. Consider if using Tellus might be a better option for you than a savings account.
Finding the best way to save your money can be hard.
You don’t want to take on too much risk or deal with the fluctuations of assets like stocks or cryptocurrency.
But you don’t want to just stash money under your mattress and never earn interest on it either.
A savings account is a great balance between these two extremes.
You can set money aside for a rainy day or big-ticket purchase while you earn interest on it. But your money is also kept safe without the risk of vanishing. Additionally, you aren’t locked into a long-term agreement that’d penalize you for withdrawing your funds early.
In this article, you’ll learn what a savings account is and all of the benefits of having one. We’ll also look at some potential drawbacks, how to open a savings account, and other factors to consider.
- What is a savings account?
- What are the benefits of having a savings account?
- Disadvantages of a savings account
- How to open a savings account
- Tellus: A better alternative to savings accounts
- Are savings accounts safe?
- Does opening a savings account impact your credit score?
- Maximize your savings with Tellus
What is a savings account?
A savings account is one where you deposit your money and get paid some amount of interest for it. Typically, these types of accounts are held at a financial institution like a bank.
Savings accounts are a great place to store your surplus cash in the short term. Since you can take your money out with relatively short notice, savings accounts are a good place to store money as an emergency fund.
The amount of personal savings that people have is higher than you might think. In 2022, the average personal savings in America (not including investments) was $62,086.
Although savings accounts tend to pay lower interest rates, they’re safer and more reliable than many other investment vehicles.
What’s in it for banks?
How can financial institutions offer interest payments for money kept in savings accounts? Primarily, it’s because they’re able to use this money for loans to their other customers.
For example, they may offer a client a line of credit at 6% and pay you 2% to use your money, profiting 4% for themselves in the process. In reality, banking is much more nuanced than this, but it gives you a simplified version of what’s happening.
Since savings accounts help financial institutions generate cash that they can reinvest into other types of investments, you’ll find them offered at almost every bank.
What are the benefits of having a savings account?
As with any kind of investment, there are risks and benefits to take into consideration. You’ll almost always be making a tradeoff between keeping your money safe and making a good return on it.
There are some obvious benefits of having a savings account.
For example, they’re low risk, and they earn you interest.
But let’s examine some of the other benefits of a savings account as well.
Easy to open and access your account
Opening a new savings account is easier today than ever.
If you’ve already got a checking account with your bank or credit union, you can quickly open a savings account. We’ll discuss the process in a later section.
You’ll usually also get access to online banking that allows you to see your savings account balance.
Plus, you can transfer money in or out of your savings account with the push of a button.
Low initial investment required
As we mentioned earlier, it’s beneficial for banks to have you put money into a savings account with them. So they tend to make the process simple and straightforward, with a low amount required to open an account.
Many savings accounts don’t require any initial investment at all. For those that do, it’s usually a very small amount, like $25 or $100.
Savings accounts are great regardless of what your financial goals are. Even students working a part-time job can open one.
If you have a lot to invest, most savings accounts don’t have annual contribution limits either.
Low or no minimum balance requirements, fewer fees
Many banks charge a monthly service fee just for the privilege of having an account with them. The average American pays $7 in banking fees every month. In order to get this fee waived, you may need to keep a minimum balance of several thousand dollars.
Savings accounts tend to have a lower minimum balance to avoid fees or no minimum balance at all. That means you get to keep more of your money without worrying about it getting eaten up by fees.
Savings are automatic
Savings accounts are an easy way to save. You can set up direct deposits and have a portion of your paycheck automatically deposited into your savings account every time you get paid.
This way, you don’t have to think about it. Your savings take care of themselves and generate interest for you without you having to think about it or take any action. You can’t forget to set money aside every month because it’s done for you.
No knowledge required
Savings accounts work in a way that’s very simple and easy to understand. You direct deposit money into your account, and you earn interest on your deposit. That’s it.
You don’t need to know anything about the stock market, money market, or crypto market. You don’t need to pay attention to financial news or worry about pulling your money out when it seems like we’re headed for a financial downturn.
Your savings account keeps steadily earning you interest, regardless of what’s happening in other financial markets.
Your money is accessible on short notice
Savings accounts don’t tie up your money for long periods or make you subject to penalties for withdrawing early, like certificates of deposit or bonds do.
You also don’t have to worry about whether the stock market or cryptocurrency will be down when you want to cash out. If this is the case, you may need to sell at a loss to access your money if it’s in stocks or crypto.
Helps you plan for your financial future
Financial experts advise that you should have savings equivalent to half of your annual salary by the time you’re 30.
By the time you’re 50, you should have the equivalent of 6–8x your annual salary in savings.
A savings account can help get you there. Setting aside even a small amount each month can really add up over time, especially as it compounds with interest.
Disadvantages of a savings account
We’d be remiss if we didn’t include some of the drawbacks of keeping your money in a savings account.
Here are some of the disadvantages of a savings account.
Low interest rates
Many banks take for granted that if you’ve already got other accounts with them, you’ll just open up a savings account with them too.
For this reason, many of them offer meager interest rates on their savings accounts.
As an example, with Bank of America, you’ll get as little as 0.01% APY, which is basically nothing! If you invest $10,000, they’ll only pay you $1 in interest each year.
In this case, savings accounts aren’t great for long-term savings.
This isn’t true of all savings products, though. So it’s worth shopping around for better rates before opening an account.
Some of the best savings rates no longer come from banks. For example, Tellus is a smart savings platform, where you can earn 3.40% to 4.50% APY on your money—that’s 16 to 21x more interest than a savings account. Plus, Tellus is 100% free to use and you can withdraw your money whenever you want.
Money may not be immediately accessible
Some savings accounts may not allow you to withdraw money from your account at an ATM like you would with a checking account.
In fact, you probably won’t even receive a debit card for your savings account.
Especially when it comes to larger withdrawals, it might take one or multiple business days to get your money. However, it’s unusual for it to take much longer than that.
May be subject to transaction limits or fees
There may be stipulations that you’re only allowed to withdraw up to a certain dollar amount from your savings account each day. Or there may be fees if you make more than a certain number of withdrawals per month.
This will entirely depend on your bank or financial institution, so be sure to read the fine print in your Terms & Conditions.
Interest rates can change
The interest rate you earn on your savings account is usually variable, meaning it’s not locked in.
The Federal Reserve can choose to raise or lower its interest rates up to eight times per year, which impacts how much interest your financial institution can offer you on your savings account.
Interest is considered taxable income
There are many types of investments and types of savings that offer tax benefits. For example, Roth IRAs, Roth 401ks, Health Savings Accounts (HSAs), 529 college savings plans, and more.
Unfortunately, interest earned on your savings account doesn’t fall into this category. You’ll have to declare any interest you earn from your savings account on your tax return, and you might need to pay taxes on it.
How to open a savings account
It’s easy to open a savings account, and there are a few different ways that you can do it.
The traditional way is to visit a bank, credit union, or other financial institution in person to open your account.
At many locations, you may be able to simply walk in and open a savings account without an appointment. However, it’s best to call in advance and book an appointment to sit down with a financial advisor just in case.
You’ll need to bring a few forms of identification, including your social security number. A bank employee will walk you through the entire process and usually fill out all required paperwork for you. That way, all you have to do is give your signature.
Nowadays, almost all institutions will allow you to open your savings account online.
You’ll have to fill out the paperwork yourself on your computer or mobile phone, but it’ll save you a trip to the bank.
Some institutions may allow you to submit your paperwork entirely online. Other times, you’ll need access to a printer so you can print your paperwork. Then you can either mail it off or drop it off at a local branch.
Tellus: A better alternative to savings accounts
With Tellus, you can open an account in 3 minutes.
Visit our website and click on the “Get the app” button. Enter your phone number, and we’ll send you a link to download the app.
You’ll be set up to earn high-yield interest and daily payouts in no time. Learn more here.
Are savings accounts safe?
Yes, with most banks and credit unions, your savings account is FDIC insured for up to $250,000. Even if your banking institution fails, your money is safe and will be returned to you.
Tellus is not a bank and is not FDIC insured. A Tellus customer’s money is protected using Tellus’ Triple-Layer Protection framework:
- Collateral: Every dollar Tellus lends is backed by high quality, US-based, single-family, residential real estate collateral with a geographic concentration in the US Pacific Northwest.
- Capital: As a second risk mitigation layer, we hold cash proportional to every dollar deposited to provide an additional liquidity buffer.
- Security: Enjoy peace of mind with bank-level AES 256 encryption supported by industry-leading partners, including Plaid, Stripe, IDology and Riskified, and a US-based treasury and risk management practice.
Does opening a savings account impact your credit score?
You can open a savings account without worrying about it having a negative impact on your credit score.
Some factors that do impact your credit score include:
- Payment history
- Credit utilization ratio
- Credit mix and types
- Length of your credit history
- Recent credit
Even though opening a savings account won’t impact your credit score, sometimes lenders do ask for information about your income and assets before offering you a loan. That can include money that you’ve got in your savings accounts.
Your savings account can actually help you when it comes to lending decisions. So it’s useful to have money in a savings account if you want to take out a loan in the future.
Maximize your savings with Tellus
A savings account is a great way to start earning a return on your money.
There are a couple of downsides to saving accounts. Namely, some institutions may offer measly interest rates. And they charge you to keep your money in their institutions. For most savers, fees are the single greatest destroyer of value when looking at your real rate of return.
However, opening a savings account is fast and easy. You don’t need much money to get started, and you don’t need to know about more complicated investments like the stock market or cryptocurrency. Your money also isn’t locked in like with certificates of deposit. You can withdraw anytime.
Tellus offers all the conveniences that you’d get from a savings account, while letting you earn up to 21x more money. And customers love it.
Download the Tellus app today and start saving faster.
Tellus Products Provide:
✅ Ease of use (3-minute sign-up; 100% mobile)
✅ High yield income on idle cash (3.40%-4.50% APY)
✅ No fees (100% free to use)
✅ No lock-up period (Move your money when you need it)
✅ Daily payouts (Interest is deposited into member accounts daily)
✅ No crypto or stock exposure (Tellus does not invest in the stock or crypto markets)
✅ No credit check to open an account (Start earning in 3 minutes or less)