Hidden advantages of savings accounts

Savings accounts? Are you crazy? Boo, hiss. These days, savings accounts are only used as joke fodder for late-night comedians, but there are benefits of a savings account. Take the mom who wants to teach her kids the value of prudent financial management, for example:

For little Bobby's eighth birthday, his mother takes him down to the local credit union to open a savings account. Figuring that all the grownups in his life would pour money into this new savings account to encourage him — without his lifting a finger — Bobby reasons that the offer is hard to beat. So, off to the credit union they go.

At his mother's prompting, Bobby explains to the banker that he came to open a savings account. The banker gives a knowing glance to the mother and pushes the application form across the desk to Bobby. “Well, sir, this is your account, so you have to fill it out.”

Bobby methodically makes his way through the form, but pauses when he comes to the box that reads: “Name Of Your Former Bank.”

After a minute, he grins as he writes … “Piggy.”

Ba-da-boom! [Cue the clash of cymbals.]

If you're like millions, you might think that savings accounts have no more use than old-fashioned, lame jokes.

Related >> Which Online High-Yield Savings Account and Money Market is Best?

Think again.

I used to stick my nose up at savings accounts too, until my late father-in-law told me he invested in nothing but an old-fashioned savings account. He was a wise man of few words; so when he spoke, everyone listened — including me. Until his death, he lived frugally — but comfortably — on those savings.

My father-in-law's experience made me look at savings accounts with different eyes. Granted, he did this in the days when they paid interest rates with real numbers before the decimal point. That's no longer the case, is it? These days the return you get on savings accounts barely moves the needle on the return scale. We often joke that banks use those accounts to challenge their IT people to see how many zeroes they can get into an interest rate, like 0.000001%.

Ha-ha! [Cymbals.]

Nevertheless, I still believe savings accounts are a viable part of a successful investment strategy.

Why in the world would anybody think that?

Well, first of all, there are the old standby arguments you always read when you do a search for something like “the advantages of savings accounts.”

The Obvious Advantages of Savings Accounts

1. Liquidity

With most investments, there is a time delay involved in getting access to your money. But sometimes you need quick access to your funds. Our furnace went out a short while ago, right before a really cold snap moved through. (In fact, it was only when I went to turn on the pilot light that I discovered it had given up the ghost after 30 years.) Thankfully, we had enough sitting in a savings account to take care of that problem immediately.

2. Safety

Everyone knows that (in most cases) the Federal Deposit Insurance Corporation (FDIC) guarantees up to $250,000 of your money in a savings account. Now, I know there is a cadre of people out there who believe the sky is about to cave in on us and that that guarantee is worthless; but for the rest of us, that guarantee makes a savings account as safe as anything you are going to get anywhere. And as Warren Buffet often remarks, “Rule #1 in investing is: Don't lose it. Rule #2 is: See Rule #1.” For safety, it is hard to beat the savings account.

3. No hurdle to start

As Bobby's story above illustrates, getting started with a savings account is both quick and easy. No minimums, no fuss, no conditions, no nothing — just “git ‘er done” and you're in business.

The Not-so-Obvious Advantages of Savings Accounts

Now, as Tom Selleck used to say in “Magnum, P.I.,” “I know what you're thinking.” We've heard this a million times, and by now those arguments insult our intelligence because they downplay the abysmal returns quantitative easing is causing us to endure. You are just writing this to get another post out there, or who knows why. Wake us up when you have something real to say. How do I know that? Because I used to think that … until just under 10 years ago.

In a previous post, I related how my wife and I had a wake-up call late in life and we suddenly went into overdrive-catch-up mode determined to cobble together as much of a retirement fund as we could in short order. Like many people, I didn't know where to begin when it came to investing. That's when I discovered the first of the hidden advantages of a savings account.

4. You don't need to know anything

On my other blogs, I often hear from readers who explain why they put off investing or (worse) have no plan to invest at all. Close to the top of their list of reasons is ignorance: They don't know what to do or how to invest. I didn't either, so I started by simply piling all our spare money into a savings account.

This is the age of the Internet and, if you want to learn, there are many places where you can learn how to invest, for free or for money. However, you don't need to know anything to get started with a savings account. You can always reinvest what you have deposited there somewhere else, but it is almost impossible to get back what never got put in there in the first place.

5. You don't need to take any risks

As pointed out above, a savings account is probably the safest starting point for any long-term investment strategy. It is the easiest thing in the world to move money out of a savings account into another investment vehicle when the opportunity presents itself. As an example, if the house next door becomes available and you want to buy it as a rental property, where do you put your funds as you scrape up the down payment? Your savings account would be a good start … if you were faithful and consistent to keep building it.

6. You buy time to learn

Ignorance is one of the biggest obstacles holding people back from being determined and consistent investors. Ignorance usually leads to this kind of statement: “If I don't know what to do, I'm very afraid of losing my money.”

Well, if you start with a savings account, you buy yourself enough time to learn all you can about investing, until you are comfortable that you know what type of investing interests you, and then you can ease into that at your own pace — with the capital you have been saving all along!

7. Positive reinforcement

Nothing succeeds like success, they say. Instead of procrastinating out of fear and ignorance, when you start with your humble savings account, you see progress after a few months. Sure, it's not a million dollars, but it is more than you started with.

Once we saw our savings account grow, it inspired us to see if we could do even better. It's hard to put a value on this positive reinforcement, but for us it was invaluable. The biggest mistake people make is not following through with their investment plan. The instant feedback you get on your growing savings account can be a motivator to keep going, if that sort of things has meaning to you (as it did for us).

8. Reality is on your side

Reality? What reality? This reality: No matter what you invest in, for the first five to 10 years, the lion's share of your nest egg consists of your own contributions.

When you make the decision to get serious about investing, you can take some comfort in the fact that you don't lose a lot by taking a year or two to learn all you can about investing while you simply stash cash in an old-fashioned savings account.

(In fact, you could think of that teeny, little bit of interest you lose as your school fees, which are cheap at the price, all things considered.)

But that doesn't mean you should wait to open a savings account if you don't already have one …

… because the biggest key to investing success, as many have pointed out, is simply to get started. And there is no easier and safer way to get started than to open a humble savings account. You don't need to restrict your investing to savings accounts like my father-in-law; but as a starting point to a successful investing career, savings accounts are hard to beat.

Did you use a savings account to help you get started investing? What do you see as the advantages of savings accounts?

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Beth
Beth
5 years ago

Alas, I remember when my President’s Choice savings account paid 5% interest! Now it’s just over 1% and sometimes they offer 2.5% on new deposits for a couple of months. Ugh! I hate that today’s interest rates encourage people to borrow rather than save.

Today, I think the real value in a savings account isn’t the earnings: it’s learning to spend less than you earn and delaying gratification.

Debi
Debi
5 years ago
Reply to  Beth

I may be showing my age but I remember getting 7% on 1 year CD’s as I was saving to send my sons to college. The last time I looked at a CD rate I was offered under 1%. I’m sure glad I got over my fear of investing.

Sean Friend
Sean Friend
5 years ago
Reply to  Debi

I actually got 5% on a basic CD as recent as 2008 and I’m only 25 now. I remember putting my 5K in student loan money into that puppy and getting real money back lol…now it is basically an non-liquid savings account

Emily @ Simple Cheap Mom
Emily @ Simple Cheap Mom
5 years ago
Reply to  Beth

I used that PC account to save for my first house downpayment. It was great! Savings accounts are great for the first push to save, but I know I don’t have one anymore.

Beth
Beth
5 years ago

Interesting! May I be nosey and ask how why not?

I have a few — home downpayment (I’m close to buying), my emergency fund, short term goals (currently a trip) and my RRSP top up (extra cash I set aside during the year in addition to my auto transfers).

HKR
HKR
5 years ago
Reply to  Beth

I know I don’t have one because the best interest rate I found was on an interest bearing checking account. It requires direct deposits and x number of debit card transactions, so I can’t keep it separate from my transaction account if I want to get the interest. Instead, I put all my non-invested money in it and keep two registers – one for my budgeted spend money, the other for my savings. To see if my account balances, I just add up the balances of the two registers and compare them to the balance shown in the checking account.… Read more »

Kevin
Kevin
5 years ago
Reply to  Beth

i found that ge capital has the highest interest rate at 1.05%. It’s a money market so still relatively liquid.

getagrip
getagrip
5 years ago
Reply to  Beth

Sadly most of the people making claims of “great” returns on savings accounts are forgetting a fundamental point, that the only times savings accounts were providing these great rates were when inflation was eating the accounts alive and the accounts were still typically negative at year end when it came to buying power. You hear the same whining about CD rates as if banks have ever had incentive to pay depositors big bucks.

Tina in NJ
Tina in NJ
5 years ago

We have a couple of money market accounts where we stash the most liquid portion of our emergency fund. One of the accounts started as a separate account to put money I collected for a tribute to our church choir director, which morphed into another dedicated account. Nothing beats the local bank for liquidity (ok, the mattress might); when Superstorm Sandy threatened, we just had to head to the ATM for cash to tide us over.

Mike
Mike
5 years ago

I set up an online savings account for each of my young children and we usually take part of any money they receive as a gift and deposit it so their account continues to grow. They love checking in to see how much they’re earning in interest and it helps them appreciate the value of saving.

Rebecca@TheFamilyFinder
5 years ago

We saved our emergency fund in a savings account before we started investing. I will admit that we started there because we did not know much about investing. When we started saving it was not for our emergency fund. We designated it for emergencies after doing much reading and educating ourselves. Eventually we took the plunge into some investments.

JoeM
JoeM
5 years ago

I don’t really use savings accounts for savings, but for separating my funds for various purposes. I have a Capital One/old ING online savings account that is my emergency savings. That is pretty set. Then through Ally I have 3 separate online savings accounts for: (1) auto expenses, (2) tuition/education expenses, and (3) wedding expenses. $40 every week goes into my auto account. This lets me lump sum pay my insurance every 6 months without hesitation – I just transfer the balance over. $100/week goes into my tuition/education fund. I’m wrapping up classes for a second degree at a community… Read more »

BegToDiffer
BegToDiffer
5 years ago

I have to disagree with #8 (Reality is on your side). By deferring investment, you’re not missing out on the first few years, when the benefits of compound interest are smaller. Those years will occur no matter when you begin investing. Assuming a fixed retirement date, deferral in fact causes you to miss our on the last few years, when earnings really start to outstrip contributions.

William
William
5 years ago
Reply to  BegToDiffer

Totally true. However, the point was not that it’s good to miss out on those years, it was this: It’s better to start with a savings account while you get comfortable with investing than do nothing while you learn.

Make sense?

BegToDiffer
BegToDiffer
5 years ago
Reply to  William

Your point would seem to be that a savings account is better than nothing. That is true.

But it is misleading to say that deferral of investment is cheap. Your exact words are that a saver won’t lose a lot, and will only sacrifice a teeny weeny bit of interest. That is not true.

In truth, deferral of investment costs quite a lot, i.e., the final and most profitable years of compound interest.

Debi
Debi
5 years ago

Well said, William. I especially liked “No matter what you invest in, for the first five to 10 year, the lion’s share of your nest egg consists of your own contributions.” This is what I emphasize to my young employees each time they receive a pay increase. I always encourage them to increase their retirement contributions at that time, telling them that it may seem like a long time away but that at around the 15 year mark they will really start to see the snowball effect take place as earnings start to really increase. I also tell them to… Read more »

Mark Battle
Mark Battle
5 years ago
Reply to  Debi

Bravo Debi!!!!!
Wish I had gotten that jewel of Sage advice when I was young. Instead I find myself having started 15 years ago at the age of 40!! Ahh darn it, guess I will have to ramp up again after my next bonus/pay raise again (Next two months actually)
Thank you for your insight,

Ray
Ray
5 years ago

Great article William, hopefully you’ll push some of those people who haven’t started saving yet to sock some money away.

Nick
Nick
5 years ago

[quote]”Reality? What reality? This reality: No matter what you invest in, for the first five to 10 years, the lion’s share of your nest egg consists of your own contributions.”[/quote] What you fail to mention that with your average savings account, even after 50 years (and probably longer), your contributions will STILL constitute the lion’s share of the account value. This is because even with compound returns, your average saving’s account APY (roughly 0.06%) isn’t sufficient to compound your money significantly even over VERY LONG time periods. Its safe, but don’t expect any growth. Showing the compounded returns graph you… Read more »

William
William
5 years ago
Reply to  Nick

See Comment #16 above. The point of the article was that a savings account is a good way to get started, not to make it the cornerstone of your investing. “A year or two” is how I believe it was phrased. Apologies if that wasn’t clear.

AB
AB
5 years ago

When I was a teen, our bank had something called a T-Bill Tracker savings account. It paid some significant rate, I want to say north of 4%, maybe notably higher. My parents had me open one (and closed an old passbook account at the same time) and regularly encouraged me to save into it. I’m sure having the account got me familiar with the idea of saving and being rewarded for it, but I’m not sure I see it as a gateway to investing.

josefismael
josefismael
5 years ago

I have an Ally checking and savings. I keep a healthy emergency fund in the savings, and am now earning ~1% on that sum. I also have all of my direct deposits going to that savings. When bills come due at the end of the month (I’ve negotiated to get them all right around the same date), I transfer EXACTLY what I need over to the checking and pay from that account. Since Ally pays based on the average across the month, I end up maximizing my returns. Sure I contribute to a Roth, and fully leverage my employer’s 401k… Read more »

Ben Luthi
Ben Luthi
5 years ago

Savings accounts are great for targeted savings goals. For example, we use Capital One 360 because it allows us to create a bunch of different savings accounts–one for emergency fund, one for our tax savings for my business, one for Christmas, etc.

Valerie
Valerie
5 years ago

The best thing I ever did for my savings rate was to open an “out-of-sight” savings account. It’s online and separate from my day to day credit union accounts. Now whenever I get a little bonus: extra money at the end of the month, gainsharing from work, tax refunds, etc, I go and make a really quick easy deposit into my external account. I don’t see it every day, so I don’t think about spending it. I’ve been able to go from “I should have extra money! Where is it going?” to “Sweet, thousands of dollars saved already! That’s really… Read more »

akoilady
akoilady
5 years ago

I’m just beginning my money makeover, and I’m glad to see that others are using multiple savings accounts to set aside “targeted savings.” I have a number of things I have to budget for, and it’s easier for me to stash those amounts in different accounts–sort of like using envelopes in reverse. But I wouldn’t be comfortable keeping cash around. I will have the budgeted amounts automatically moved to the accounts so that the savings actually happens.

Dave
Dave
5 years ago

I think the real distinction of savings accounts are the ‘economic’ benefits (all of the reasons William mentioned above) versus the ‘accounting’ benefits (where you actually earn interest, although that’s not applicable anymore given today’s rates).

It would be interesting to know at what point consumers who use savings accounts realize the economic benefits of savings accounts no longer outweigh the accounting benefits, and eventually make the switch to money markets, IRAs, etc.

Beard Better
Beard Better
5 years ago

I think you missed a huge advantage of savings accounts, which is the planned inconvenience that they can introduce between you and your money. The annoyance of having to go to the bank to take out cash can be a great motivator for stopping impulse spending, especially if you have your paychecks direct deposited into a savings account at a bank that doesn’t have a branch near you. It’s easy to do electronic transfers for whatever bill payments you need, but somewhat more annoying to take out cash. When it comes to impulse spending, even putting the 5-10 minute trip… Read more »

Michelle
Michelle
5 years ago

We still use a savings account. And luckily, you can only transfer so many times out of it, so it keeps us pretty stable as far as how much money we can pull out.

vic @ fitfinancialfocus
vic @ fitfinancialfocus
5 years ago

I slowly started facing out my savings account and opening a bonds Roth IRA as my savings. in case of a real emergency I can pull out the money invested without receiving any penalty, unless I over draft into capital gains. It is placed in there with a focus in long term however, it has a better rate of return than a savings accoount.

Great post. at the bear minimum open a savings account and start saving, once there is a nest egg star looking how you can make your money work for you.

SavenoSpend
SavenoSpend
5 years ago

I know this won’t get published, but consider it my way of communicating w/you regarding the forums. Several weeks ago you promoted the forums. You wonder why I don’t join? The recent post by someone asking about student loans and member “kombat” posted a screed about all the mistakes the poster made. You know what? Your moderation is out to lunch. I wouldn’t join your forum on a bet. The same 5 pontificators twaddle on at all times. Seriously? I’ve seen many a thread shut down by some holier-than-thou idiot pronouncing judgement on a person for making a mistake. God… Read more »

stellamarina
stellamarina
5 years ago

Savings accounts are great things for introducing kids into financial life. I loved seeing my bank balance grow in the little bank books we had when I was a kid.

KatT
KatT
5 years ago

Savings accounts just make me sad. I ended up establishing a series of CD ladders with my emergency fund; by laddering, I still have plenty of liquidity if needed, but I make more in interest

Erin
Erin
5 years ago

OK, I’m feeling like a fool now, because I was completely unaware that so many people were moving away from savings accounts. Want to do a post for those of us novices that still rely on them telling us what the next step is?

Victor @fitfinancialfocus
Victor @fitfinancialfocus
5 years ago
Reply to  Erin

@Erin, Savings accounts are nowhere near bad and you should not feel like a fool. Ultimately if you are saving it does not matter where you store your money as long as it is not under a mattress. With that said a savings account roughly gives about 1% back or less which is not much or anything at at all. Investing in bonds like VBMFX (Vanguard Fund), however can provide about a 2% – 3% rate of return, which will follow inflation. at 1% return in savings we are deflating our own accounts by 1% if inflation raises by the… Read more »

Kayla @ Femme Frugality
Kayla @ Femme Frugality
5 years ago

Great article! I have more than one savings account actually. I love how you point out some obvious and some not-so-obvious advantages. Thanks!

Alexandria
Alexandria
5 years ago

Excellent! Exactly my feelings on the subject.

Grace @ Online Stock Trading
Grace @ Online Stock Trading
5 years ago

Actually I don’t want to miss any of the article written in GRS, in my not so valid opinion, even savings account has hidden advantages, it will still only a small part in asset allocation strategies. Maybe 5-10% of assets and the rest are in stocks or real estates. Because savings can’t even help us fight inflation. Savings are only use for building cash reserve or what we call it the emergency funds. Still, it is better to put our money in the stocks or mutual funds so that when retirement comes, we can assure we have enough earning asset… Read more »

Laura H
Laura H
5 years ago

I’m all for this post. Savings accounts give my husband and I boundaries to separate our money – i.e. Christmas, vacation, auto insurance, etc. That way we don’t touch it and it’s still liquid – as you said. People need to give themselves permission to use accounts as tools and not worry about the pidly interest. The better you budget, the more you can invest, right?

Nick @ Millionaires Giving Money
Nick @ Millionaires Giving Money
5 years ago

I live in the UK and there are a number of bank accounts which offer great savings rate similar to savings account. Usually these rates are 3 to 5% and you can hold a small amount in cash £2000 to £20,000 with instant access. The liquidity definitely gives me peace of mind because I can access the money quickly just in case I get caught with my trousers down.

Sam
Sam
5 years ago

I have been following GRS since I was fresh out of college. Thanks to J.D, I am proud to say that I have a Roth IRA that I contribute fully to for 6 years now and I am starting to see the account grow significantly recently. I also was able to paid off 2 cars, college loans, buy a second house (b/c I got married and rent out the first house.

My next challenge is to learn how to invest in the stocks,mutual funds, etc.

The Roamer
The Roamer
5 years ago

I sure did and it really is a great place to start.

After that I moved into CDs ,then 401k and finally my IRA it was a progression.I also

So I agree instead of waiting until you can have your dollar earn 8% Get it saved up first.

Drew Ahlers
Drew Ahlers
5 years ago

I understand the importance of having a savings account, but at what level should people start to pull out of savings and get more aggressive with their money? besides liquidity wouldnt you be better off with a t-bill if you can? I mean your talking around 2% vs. .00001% and is also highly liquid. I understand the importance of having a savings you can dip into in an emergency ad to have cash on hand but at what cost? Wouldn’t you essentially be losing money to inflation. Everyone needs a savings account but at what point do you move on?… Read more »

Mike
Mike
5 years ago

I like the “positive reinforcement” statement. Particularly, for my kids. They get excited to see their savings account balances grow each time they deposit a few buck. I like that it it making them feel good about saving. I feel that will train them to be savers for the rest of their lives.

Robin Briggs
Robin Briggs
5 years ago

I started with a savings account and it still holds about 50% of my investments. It’s a safe base and source of funds for investing which means I never have to borrow to invest.

Brian
Brian
5 years ago

Savings accounts are great, and the interest rates barely matter. The difference between inflation and the low interest is just your “insurance premium” cost for keeping your own money liquid enough to address unexpected expenses (which happen, to all of us). It’s like having your own little private insurance company, and being self insured will save you far more in the long run (by being able to afford, for example, the higher quality and efficient refridgerator when the old one dies, paying cash so no interest) than the “low” savings interest will ever gain you. Another overlooked benefit to having… Read more »

Sameer
Sameer
4 years ago

Fixed rates came down so as to make people invest in riskier assets. Lower interest rates only encourages debt and not savings.

Jubes
Jubes
4 years ago

Savings accounts are very, very, very good (so long as rates are above the zero mark). Although I’ve had savings and investments my whole life, I was basically comatose, completely unaware of the fundamentals of finance. I was prompted by my parents to stash my cash in savings until I had $1,000 then hand it over to an investment adviser – never again! Later I was convinced that I should have as much money as possible into investments to take advantage of compounding and leave only a small amount in savings to cover expected short term expenses. This advanced-advice I… Read more »

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