You Need a Savings Account - and You Deserve a Better One

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A Pink Piggy Bank Surrounded by US Dollars against a white background
Linda Matlow/Alamy
When interest rates on savings accounts hover near 0 percent, it's easy to see why so many people shrug off the question about where to park their emergency cash. Financially savvy people assume that they can get better returns by putting money in stocks or mutual funds instead of letting the it "languish" in a low-interest savings account. But everyone needs a place to keep some liquid cash.

Think of it this way: If you have your paycheck deposited into a checking account for paying bills, and sweep all your leftover savings into a retirement fund or an investment account, what will you do when you have an emergency like:
  • Your car breaks down and needs a costly repair the same week that you're paying your mortgage and an estimated tax payment.
  • Your condo association informs all owners that the cost of repairing the roof of the building after a rash of storms has depleted the condo reserves, and therefore all owners are required to pay a special one-time assessment.
  • Your child gets sick and needs an expensive medication, but you just dipped into the cushion in your checking account to pay the previous month's doctor's bill.
When you need cash fast, most options come with undesirable side effects. Pulling money out of an investment account can take time and sometimes incur penalty fees and taxes. On top of that, you could be forced to sell investments at an inopportune moment. Using a credit card can mean you're borrowing money at an average interest rate of 15.61 percent, according to Bankrate.

A savings account provides the necessary back-up funding for your checking account and give you the peace of mind that you don't need to rely on credit or tap into your investments when the unexpected occurs.

And while its low interest rates means that a savings account is not the go-to investment for future expenses (the "future" being anywhere from next week to five years from now), it is the right place for cash to serve as a safety net for unexpected expenses as well as a temporary parking spot for planned future purchases. That said, keeping your cash accessible doesn't mean settling for zero interest.

Why Compare Savings Accounts

A recent survey by MagnifyMoney.com revealed that 73.4 percent of Americans with savings accounts keep their money in a traditional savings account that currently pays interest rates close to 0 percent, and of those who have a savings account, the average balance comes to $28,696.
By shopping around among bank, credit union and online-only savings accounts, you can find one that will increase the interest you earn, lower your fees and still meet your needs.

The survey showed that millennials are more likely to have an online savings account (18.8 percent vs. 13 percent of non-millennials) and they're also more open to considering an online-only savings account (55.1 percent versus 28.2 percent).

Internet-only accounts often pay 0.9 percent or more on savings, according to MagnifyMoney, while bank savings accounts are paying as little as 0.01 percent. Switching from a traditional account to an online savings account means that the average American (with that $28,696 balance) would earn more than $250 a year on their cash stash instead of settling for just $5 a year in interest.

How to Compare Savings Accounts

Websites such as Bankrate.com, SavingsAccount.com, MagnifyMoney.com and MoneyRates.com offer quick rankings to compare various savings accounts rates, but your decision about which savings account to open should be based on more than just interest rates. You should also consider:
  • Fees. Some savings accounts charge fees unless you meet minimum balance requirements or have established direct deposit. Any fees will cut into the limited interest you earn.
  • Interest compounding. For the maximum interest earnings, make sure interest is compounded daily.
  • Overdraft protection. If you're concerned about overspending on your checking account, make sure you can link the savings account to provide overdraft protection.
  • Account set-up. If you're interested in saving for a variety of specific goals, such as a vacation or a down payment on a house, you may want to look for an account that allows you to set up sub-accounts so you can more easily track your savings.
  • Availability of funds. Find out how quickly any deposits are credited and how long it will take to transfer from one account to another. Accounts within the same bank usually allow instantaneous transfers, but some online-only savings accounts can take a day or so to complete a transfer.
  • Check on Federal Deposit Insurance Corp. insurance. While most savings accounts are FDIC-insured, take a moment to double-check on the insurance so that you don't risk losing your money. One of the main benefits of a savings account is the lack of risk.
  • Check the rules on withdrawals. Most savings accounts and money market accounts limit their customers to six withdrawals per month. Find out what happens if you make too many withdrawals.
Checking out the requirements and fees on multiple online-only accounts takes a few extra minutes longer than just opening a savings account at your usual bank. But if that time results in increased interest earnings of several hundred dollars per year, it's definitely worthwhile.

Michele Lerner is a Motley Fool contributing writer.


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22 Comments

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scottee

we need an excellent interest rate on savings accounts. who will do that? and when?

July 04 2014 at 7:51 AM Report abuse rate up rate down Reply
rogerdrake34

I recommend looking to local banks. They pay better rates on pretty much everything and how fewer fees. Another reason is that I just don't trust bigger banks. I had a financial "advisor" at one, who I am embarrassed to admit sold me a $300 a month life insurance policy, and some how I thought it was a good idea and went along with it. Well, also embarrassingly, I didn't really do any research for a couple years, and I paid it all along. It turns out you can get the same coverage for like $20 a month. I got mine at Life Ant, but there are other good places too.

Now I bank with a small community bank, no ATM fees, interest earning checking account, and they are honest. It's much better. I would say start here for anyone with good local banks near them.

June 21 2014 at 6:01 PM Report abuse +1 rate up rate down Reply
BRYANT

Yep, the cost of living is about 2%, so putting your money in any account that pays less is losing you money.

June 12 2014 at 3:06 AM Report abuse -1 rate up rate down Reply
mrck922

With interest rates so low a savings account is a waste of one's money. A flatlining economy and trillions of dollars of debt being run up by our government and the debasing of our currency means that savers are losers now. And if another damned Democrat is put into the White House it will mean a flood of illegal immigrants that the taxpayers will be supporting with food stamps, welfare and social services and educating so we'll be paying for teacher salaries and pensions and of course all their medical care and it keeps coming and coming with no end in sight because of all their misplaced "compassion". I hope Hillary has a damned stroke before 2016!

June 11 2014 at 9:28 PM Report abuse +1 rate up rate down Reply
thefacts22

The millions of americans that horde cash,or keep it in safe deposit boxes grows every day.Since Oba was elected,we have been under Socialist policies,and interest rates have been near "0",but the economy is not going anywhere,and all the trillions spent are NOW pure debt,all of it has been either stolen or simply pocketed by the "cronies" or "given" away to illegal immigrants and the eternal welfare leeches

June 11 2014 at 8:04 PM Report abuse -2 rate up rate down Reply
rgkarasiewicz

Never keep much on deposit in any savings account as you're only an unsecured creditor to any of those funds. Otherwise, you will be left holding the bag. Either purchase U.S. Series I Savings Bonds, or horde cash.

June 11 2014 at 1:44 PM Report abuse -1 rate up rate down Reply
1 reply to rgkarasiewicz's comment
sadiemae1214

Fool! Ever hear of Credit Unions? No "unsecured creditor". Credit Union depositors OWN a piece of their credit union, the interest rates on savings accounts are higher and all credit unions are FDIC insured. Savings bonds take too long to mature and, sorry, but not trustworthy. Used to be that a $25.00 savings bond took 10 years to mature and the result was $50.00 when cashed in. Don't know what it is now but I don't know anyone that buys them anymore.

June 11 2014 at 2:46 PM Report abuse +1 rate up rate down Reply
1 reply to sadiemae1214's comment
rgkarasiewicz

All that it will take is just one big bank to fail, and the rest of the big banks will go down in dominos. When that happens, you can be sure that one will not even be able to withdraw a plug nickel from any of the credit unions. Credit Union members hold nothing at all except I.O.U's. as the "Board of Directors" in those institutions are the ones who call the shots. FDIC? I think that you mean NCUA. At any rate, that insurance is only a pipe dream now.

June 11 2014 at 3:32 PM Report abuse -1 rate up rate down
Carl A Logan

If all the comments would learn to ask the right question as suggested, they would know where to build an emergency fund/short term savings rather than a typical bank savings account. The banks are making upwards of 15% on the money you deposit and only pay your less than 0.01%.
Learn to ask the the right questions, and stop using their plastic cards for your emergency money. the rates are too high.

June 11 2014 at 12:47 PM Report abuse +1 rate up rate down Reply
POLOK5

TRY A MONEY MARKET ACCT. MY STATE EMPLOYES CREDIT UNION IS AT 1 % ALOT BETTER THAN MY BANKS .01%% SAVING ACCT.

June 11 2014 at 10:58 AM Report abuse rate up rate down Reply
2 replies to POLOK5's comment
Carl A Logan

Even your state employers credit union @ 1.0%, is really not that great. There are better places. Read the suggested question to ask. With inflation @ 2.5% or higher and you must pay tax on the interest, what are you left with?

June 11 2014 at 12:53 PM Report abuse +1 rate up rate down Reply
1 reply to Carl A Logan's comment
thefacts22

That is why millions horde cash,they "including me" do not trust the regime,and refuse to pay more taxes than you make in any "CD"

June 11 2014 at 8:08 PM Report abuse -1 rate up rate down
mrck922

1%? ONE PERCENT? ARE YOU KIDDING? That, my friend, is nothing. Inflation is more than that. You are LOSING money.

June 11 2014 at 9:32 PM Report abuse +1 rate up rate down Reply
njenel

my parents were getting 51/2 % in a bank account years ago. now you get crap.

June 11 2014 at 10:20 AM Report abuse +3 rate up rate down Reply
2 replies to njenel's comment
Carl A Logan

@njenel, If your parents were getting 5.50% years ago, where are you parking your money. Did you learn anything?

June 11 2014 at 12:57 PM Report abuse rate up rate down Reply
thefacts22

Thank the Democrats

June 11 2014 at 8:09 PM Report abuse rate up rate down Reply
Marc954

How can banks justify paying so little interest when they charge so much on credit cards? They are making huge profits. It's greed, just like fast food places that pay their CEOs like King Tut while the workers have to rely on food stamps.

June 11 2014 at 9:57 AM Report abuse +4 rate up rate down Reply
1 reply to Marc954's comment
mrck922

Because of all the defaults on credit cards - it is unsecured debt. They were told by the government to "expand their credit culture" (code for giving credit to people who were bigger credit risks - draw your own conclusions as to who they might be but disparate impact is a term that might sound familiar) so we all now pay the price for that. The banks aren't about to take on ALL the risk - they spread it all around for us all to share - just like the socialists in the white house want.

June 11 2014 at 9:36 PM Report abuse rate up rate down Reply