A savings account is a deposit account opened at a bank or other financial institution. This type of account is interest bearing, which means that you earn a certain amount of interest by holding your cash funds in it. In comparison with other accounts, this type of account is flexible in terms of number of transactions and amount of funds invested, and has no specific end date. In addition, maintenance fees and transaction costs are much lower than for other types of accounts. Unlike trading or merchant accounts, savings accounts are not meant for active use. They usually hold credit payments that recur over a period of time, at the end of which the total amount saved and the interest payments are debited to a current account. Click here to open a savings account now.
Functions of savings accounts
As the name implies, an individual will open a savings account if he or she has excess funds and wants to save them for the future. This kind of account is used for cash that is not intended to be spent immediately and can serve as a long-term investment. Banks normally use these savings to finance other interest-bearing loans. Therefore, if the account holder wants to withdraw funds immediately, he or she may have to pay a transaction fee, as banks often require some time to refinance.
One of the main reasons why savings accounts may be preferred over other bank services is the fact that they pay interest. This allows you not only to set aside part of your income as private savings, but also to earn an additional monetary return. However, the banking industry has been affected by the extended run of low interest rates, particularly services like savings accounts; this means that if your main objective is to earn interest, it might be more worthwhile to consider a different financial service.
Savings accounts can easily be opened in most banks, but costs differ from one to another. The best way to make use of your savings account is to set up an automatic payment to it each month, or another more convenient interval. It is important to evaluate the appropriate amount of money that you can set aside each month and not take out again by the end of it.
Advantages & disadvantages of savings accounts
In order to understand the main advantages and disadvantages of savings accounts, it is helpful to analyse their main features, especially in comparison with other types of account.
As mentioned previously, one of the main characteristics (and advantages) of a saving account is the opportunity to set aside part of your earnings for some specific future purchase or just as a safety cushion. In addition, this type of account offers a return in the form of interest, which is an extra motivation to add to your savings account on a monthly basis instead of keeping the funds in a current account.
Moreover, savings accounts, in comparison with other interest-bearing banking services or financial instruments, are more liquid. In many cases it is possible to access the funds at short notice. In contrast, it is more complicated and time consuming (if not impossible) to make a withdrawal from a pension fund or sell a stock or other financial instrument.
If you are risk averse, a savings account is a good option for keeping your savings in a completely safe environment while earning a relatively low return. Moreover, given the current threat of negative interest rates, a savings account might be a better bet than treasury bills or other short- and medium-term government bonds.
Liquidity can also be perceived as a disadvantage of savings accounts. Taking into consideration that the main objective of this kind of account is to save for the future, having the ability to access the funds almost immediately can lead you to spend them before you had initially planned.
Looking at savings accounts from the perspective of return on investment, banks will offer a lower interest rate on your savings compared with other financial instruments. Therefore, if you are a risk-taker and you want to not only save but also see your capital grow significantly, other investment opportunities might be more suitable for you.
Our professional team of lawyers and bank agents will help you choose the right bank and type of account. We have many years of experience working with private and corporate clients. If you have any questions regarding bank accounts and their different features, please take a look at our F.A.Q. section or contact us now.