A Savings account is one of the best ways to save money, and it is also one of the safest places to put your money, but are they an asset?
This article will answer this question and do a complete overview of the advantages and disadvantages of savings accounts.
Can a savings account be considered an asset?
Yes, a savings account is an asset and a highly liquid one. In fact, a savings account can be considered a type of financial asset, just like cash, stocks, or bonds. It is also highly liquid since you can easily use that money whenever you want.
A savings account is also an income-producing asset that generates interest in your savings. It is a simple and effective way of saving money while also generating a return.
Why is a savings account considered a liquid asset?
A savings account is considered an asset because it can its monetary value can easily be used whenever you want. Assets are usually classified into two categories depending on their liquidity. They are either liquid or illiquid. This characterizes how easy it is to use for the holders of these assets to use them.
Although a savings account is a liquid asset, it can take more time to withdraw from it, and therefore it is more illiquid than cash. Since you can use cash straight away.
Advantages of savings account
There are quite a few advantages of keeping your savings in a savings account, as opposed to other forms of investment and especially checking accounts. Here are the main advantages:
- Earn interest
- Easy to open
- Secured by FDIC
- Ability to compound your money
- You can withdraw if you need the money
- Safest places for your money
- No lock-in period
- Ability to pay your bills
One of the greatest advantages of savings accounts is that you can earn interest on your money in a safe and secure way. When we compare them with checking accounts, the advantages of savings accounts stand out, and it is a far better asset because it produces income.
Easy to open
Opening a savings account is a very easy and speedy process, and most banks do not have very strict requirements. The minimum deposit in savings accounts in most banks is low. It is great for everyone to start earning interest on their savings.
Secured by FDIC
One of the best advantages of savings accounts is that it is insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. This assures that your money will always be safe, and you are running into any risks.
Ability to compound your money
From an investment standpoint, a savings account is one of the simplest and most effective ways to compound your money. Since you are able to receive interest payments, and continuously receive more income, it remains a simple way to compound your savings.
You can withdraw if you need the money
Savings accounts also allow you to withdraw money if you ever need it. Instead of other investments like bonds, or stocks that may be up and down in value, your money is always safe and ready to be withdrawn.
Safest places for your money
Due to the low risk, and the insurance by the FDIC, savings accounts are one of the safest places to put your money.
No lock-in period
Savings accounts also do not have a lock-in period, which means you can switch between banks to get the highest yield in your savings account. This easily allows you to make the most out of your savings.
Ability to pay your bills
A savings account also offers automated bill payments, which means you can use it to pay your everyday bills. This is a great advantage when compared with other ways of earning interest on your money because it is so more flexible than CDs or bonds.
Lastly, one of the great things about savings accounts is that they are liquid. You can withdraw money whenever you want, although there are some limits, it is still a great option.
Disadvantages of savings account
There are also some disadvantages of savings accounts, that should be taken into consideration:
- Withdrawal limits
- Low interest
- Possible fees
- Minimum deposit
- FDIC has a limit
- It can be tempting to spend money
- Variable interest
One of the disadvantages of savings accounts is that although you can withdraw money from them, there are certain limits. There are Federal regulations that prevent withdrawing funds multiple times from your savings account. In fact, you can only withdraw money from your savings account six times per month, according to Federal Reserve’s Regulation D.
Inflation can easily eat up all of the interest you are receiving in your savings account. To avoid that you need to make sure that the interest on the account is higher than inflation. Do not forget to subtract all the fees and costs.
When we compare the interest received in savings accounts with other investment opportunities, the interest is very low. This reflects the safety of keeping your money in a savings account. At the same time, you might want to spread your money across different safe investments, to diversify your portfolio.
Depending on the bank, there are several fees associated with a savings account. Fees will end up eating your savings, and with the low interest, it might not be the best solution.
Although most banks are very flexible when it comes to savings accounts, and the minimum deposit required to open one, some banks are actually a little demanding. In fact, some of the banks that offer the best interest, will often also ask for a higher minimum deposit.
FDIC has a limit
One of the greatest advantages of a savings account is that they are insured by the FDIC, however, the maximum amount insured is $250,000. This means that if you have more than that in your savings account, it might be a better idea to find somewhere else to put your money.
It can be tempting to spend money
Since you can easily withdraw money from your savings account, up to 6 times a month, it can be very tempting to spend. If you tend to be an impulse buyer, perhaps it is better to keep some of your savings in another type of account or invest it.
Finally, another aspect you should consider is that the rates of your savings account might change over time. This means that the interest payments might fluctuate. Therefore, you might have to constantly look for the banks that offer the highest-interest savings accounts out there.
How much money should you keep in your savings account?
Depending on how much money you have saved up, and how much money you will need in the foreseeable future, savings accounts can be a great way to earn interest on your money. This does not mean that you should put all your savings there, and use it as an investment vehicle.
Although savings accounts are one of the safest places to put your money, the returns achieved are nothing to write home about. In fact, you never heard about the millionaire that made his millions through a savings account.
With that said, you should keep your emergency fund in a savings account. It is a simple way to earn interest on money that you would not use otherwise and direct your investments towards other assets that can generate larger returns, like stocks.
Savings accounts remain one of the most common assets for everyone, and there are good reasons for it. They are easy to open and provide you with interest. Whenever you need it, you have the safety of being able to withdraw that money.
To make the most out of savings accounts, you need to choose the ones with the lowest fees and the highest interest.