Why Are Savings Accounts Important
Emergencies show up at the most inopportune time, whether it’s an unexpected trip to the ER, a surprise auto repair bill, or a busted pipe spewing water in your basement. And when life shows up — as it always does — where will your employees turn for financial resources to help you manage the situation? If they’re like most Americans, they likely have insufficient savings —nearly 70% of Americans have less than $1,000 stashed away — or no savings at all.
Without adequate savings in a bank account, a relatively minor financial molehill can easily turn into an insurmountable mountain for your employees. Unfortunately, many will attempt to rectify the financial emergency with a high interest-rate credit card — if available. Some will have no option other than to turn to the exorbitant rates of payday loans. They may even have to mortgage their future by tapping into their employer-sponsored retirement plan, such as a 401(k). For the majority of Americans with little to no access to affordable credit, lack of savings can be very costly and derail their financial goals.
Fortunately, we can help. As one of the largest, oldest, and most comprehensive financial wellness providers in the U.S., FinFit can help your employees develop healthy savings habits and create a plan to start saving today. Read on for a deeper dive into the ins and outs of savings accounts. Click here to request a demo today.
What Is a Savings Account?
As a cornerstone of personal finance, a savings account is a type of deposit account offered by banks, credit unions, and other financial institutions. A basic short-term savings vehicle allows individuals to set aside money for a rainy day, special event, vacation, or any other financial situation that may arise.
A savings account should provide easy access to make manual or automated deposits, empowering your employees to securely and confidently save money. As an added bonus, the best savings accounts will pay interest as their funds build, accumulating annual yields. Some online banks and online savings accounts offer high-yield savings accounts that pay higher rates and can have minimal to no monthly fees.
While there are several types of accounts, including brokerage accounts, that do earn interest and appreciate, savings accounts are unique in they are insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC). The FDIC is the main federal regulator of banks chartered by states that are not a part of the Federal Reserve System. In either case, the FDIC’s backing offers extra peace of mind: in the event the bank fails, this agency will reimburse the savings balance up to the allowable limit of $250,000.
How Do Savings Accounts Work?
To get started, employees need to open a savings account at a FinFit or another financial institution and deposit money into it. As long as the funds are left in the account, it will earn interest. With many automated programs and direct-deposit options available, employees can conveniently grow their balance as they work to achieve their unique savings goals, such as:
- Emergency savings account
- A family vacation
- Down payment on a house or real estate
- Down payment on a vehicle
- A just-because savings account
Depending on the financial institution, a savings account may be free to open and maintain, which means there are no monthly maintenance fees associated with the account. FinFit savings accounts are fee-free, with no monthly maintenance fees and no minimum balance requirements. Other financial institutions may require individuals to maintain a minimum balance, such as $500 to avoid a monthly maintenance fee. When performing evaluations for different savings accounts to offer your employees, make sure you evaluate the unique parameters of the account which can include key elements like:
- Minimum initial deposit amount
- Minimum account balance requirements and
- Monthly or quarterly withdrawal limits
Are There Different Types of Savings Accounts?
Because of the variety of potential needs, individuals can open one or several savings accounts, including a small business account. Each account can be earmarked for a specific purpose. Ensure the account affords the ability to easily withdraw from the account with minimal restrictions, in the event funds are needed to achieve savings goals or handle a financial challenge.
Are There Fees for a Savings Account?
The number of and type of fees for a savings account varies from institution to institution. Traditionally, most financial institutions have restrictions on how often the account can be withdrawn penalty-free. For example, a financial institution may allow up to six savings account withdrawals in a quarter. If this withdrawal limit is exceeded, the financial institution may charge a marginal fee or require conversion of the savings account to a checking account or Money Market account with more flexible withdrawal functionality.
Understanding Savings Account Interest
Savings accounts that have strong Annual Percent Yields (APYs) will help the balance grow more quickly. When money is deposited into a savings account, it empowers the bank to lend money to others. As a result, the savings account earns interest on the money as the financial institution’s way of saying thank you. However, savings accounts in general will have lower initial deposit requirements, lower monthly maintenance fees, lower monthly balance requirements, which means lower APYs.
Savings Accounts vs Other Types of Investments
In addition to savings accounts, there are a number of other short-term savings vehicles available. Once employees have paid down debt and established a basic savings account, they may have the opportunity to broaden their investment strategy. Some of the most common are listed below.
Money Market Accounts
Money market accounts (MMA) often combine the best features of savings accounts with checking account options, such as check-writing abilities and even debit cards. Money market accounts tend to pay higher APYs compared to savings accounts because the funds may be invested in mutual funds or similar vehicles. However, MMAs usually have significantly higher balance requirements so it’s important to read the fine print closely.
Certificates of Deposit
Certificates of Deposit (CDs) are engineered to hold funds for a predetermined term, such as three months or three years. During the term, individuals are unable to withdraw money from the account unless they pay a penalty. The longer the term, the higher the interest rate may be. At the end of the term, the original principal plus any accrued interest may be withdrawn.
Cash Management Accounts
Cash management accounts (CMAs) are a relatively new short-term savings vehicle offered by robo-advisors or investment firms. These accounts do pay interest but lack the security and insurance of a savings account.
Savings Accounts vs Spending Accounts
Now that we have laid the groundwork by explaining the ins and outs of a savings account, let’s review the benefits of having a spending account associated with a savings account.
The most significant difference between a spending and savings account can simply be boiled down to the names of the accounts and their inferred meaning.
- Spending accounts are specifically designed for daily spending. Almost all spending or checking accounts will come with a debit card; some may include check-writing privileges, and a very high number of withdrawals.
- Savings accounts are designed for saving. Because of this, the savings account may not have direct check-writing privileges from the account. If the savings account is linked to a spending account however, it likely offers the ability to withdraw funds via an ATM card. Savings accounts traditionally limit the number of withdrawals allowed during a given time period.
Spending accounts generally offer an unlimited number of withdrawals and the least encumbered access to funds. Because of the inherent purpose of a savings account, funds deposited into the account are generally not as accessible. Most financial institutions will limit the number of withdrawals allowed from a savings account within a period. If the number of allowable withdrawals is exceeded, the account holder may be subject to a fee. This practice was previously a federal requirement, but it was relaxed back in April 2020 due to the financial distress caused by the COVID-19 pandemic.
Interest Earned on Savings Accounts vs Spending Accounts
Another differentiating factor between spending and savings accounts is usually the interest rate. Virtually all savings accounts will pay some percentage of interest on deposits, even if it is minimal. Although spending accounts traditionally do not pay interest, some financial institutions do offer nominal rates to encourage higher balances.
For example, a spending account may offer interest for those who maintain an average daily balance of $25,000. However, keeping such a high balance in a spending account is usually not recommended — unless there is a specific reason for the funds to remain accessible. Otherwise, a savings account would be optimal to allow the money to accrue interest.
Fees for Savings Accounts vs Spending Accounts
Today, there are usually several ways to avoid fees on both spending and savings accounts. Some of the most common fees associated with savings and spending accounts include:
- Monthly maintenance fee: If an account has a monthly maintenance fee, it can typically be circumvented by maintaining a minimum balance. Ideally, your employees will have access to fee-free spending and savings accounts like the FinFit Spending and Savings Accounts.
- Overdraft fee: Only spending accounts have an overdraft fee.
- Out-of-network ATM fee: While commonly associated with spending accounts, savings accounts may also charge fees for withdrawals made on ATMs out of the financial institution’s network.
- Withdrawal limit fee: If the monthly or quarterly withdrawal limit set by the financial institution is exceeded for a savings account, fees may be assessed.
Should Your Employees Open a Savings or a Spending Account?
Both! Spending accounts and savings accounts are complementary — not competitive. Both of these accounts are key to managing a budget, improving financial health and achieving financial goals. When both accounts are opened with the same financial institution, it makes financial management easier. Most importantly, the savings account can then serve as a buffer or as overdraft protection for the checking account.
Checking Account + Savings Account = Overdraft Protection
Overdraft protection is a popular option that uses the funds in a savings account as a security blanket in the event an employee overdraws their checking account. For example, if there is only $5.00 in the checking account and the attempted purchase value is $25.00, the transaction could be:
- Declined, or
- Paid by the bank, which could generate a hefty insufficient funds fee.
Overdraft protection helps employees avoid these unfavorable outcomes and protect their hard-earned money. As long as sufficient funds are available in the savings account, an overdraft protection program would automatically move the funds to the spending account to cover the transaction.
How Much Should Employees Keep in a Savings Account?
The ideal balance to maintain in a savings account will vary by employee, based on their needs and financial goals. An excellent place to start is by establishing an emergency saving account for unexpected expenses. The goal for this account should be to have anywhere from three to six months of living expenses to protect against job loss or an emergency. Once an emergency savings account is established, employees can focus on opening specific savings accounts for life events, increase allocation to pay off debt to improve their credit score or establish a downpayment for a real estate purchase.
Do Your Employees Think They Don’t Make Enough to Save?
One of the most common and dangerous sentiments many individuals must overcome is the notion that “I don’t make enough to save anything.” First and foremost, no matter how much you make, you can save. Saving as little as $10 to $15 a week can quickly add up after a few months. Most financial institutions make it very easily to establish automatic transfers from checking to savings, or employees can allocate money directly from their paycheck to be deposited into their savings account every paycheck. Stack saving is another great way to slowly increase the amount saved.
The key to stack savings success is to start small. If your employees can get in the mindset of putting a small amount of money away, they will be able to increase the amount over time. Behavioral change for their spending and savings accounts. It might sound impossible for many of your employees if their goal were to save $1,378 in a year’s time. That’s a big number. But what if they had to put just $1 into savings this week? Next week, put in $2. The following week, $3. See the pattern? Save one dollar more than the previous week. It’s called “Stack Saving.” By the end of a full year, they would have $1,378 in savings just by taking incremental steps each week. And it all starts with a realistic, attainable plan.
Unlock the Amazing Benefits of a Savings Account
A savings account isn’t a nice-to-have; it is a must-have, foundational component of any financial health journey and must be contemplated during the financial planning phase. Let’s recap the benefits of a savings account:
Savings Accounts Are Insured by the FDIC
Savings accounts are unique in they are insured up to $250,000 by the FDIC, offering peace of mind that the money will be there in the rare event of bank failure.
Savings Accounts Are Low-Risk
Because savings accounts are not invested in the stock market, they are extremely low risk. When your employees deposit money into a savings account, they are essentially lending the bank money. The bank — in turn — issues loans to other customers with those funds. Your employees earn interest as a token of the financial institution’s gratitude.
Everyone Can Open a Savings Account
While some short-term savings vehicles like Money Market Accounts or Certificates of Deposit may require higher starting balances, everyone can open a savings account with virtually any amount of money.
Open Complimentary Spending and Savings Accounts
A spending account is essential for everyday money management and access to funds. Opening a complimentary savings account creates a dedicated account earmarked for a particular event, purchase or unexpected financial challenge. This point of delineation can help separate funds while strengthening healthy savings activity. Separate spending and savings accounts also makes budgeting for short-term and long-term goals easier.
Open Several Types of Savings Accounts
No matter the savings goal, there is a savings account exclusively designed for that. Open several savings accounts that support each unique financial goal. Having specific reasons to save can also encourage your employees to save more, knowing there is an end goal or reward.
Contact FinFit for Tailored Savings Solutions
Establishing savings can be daunting for many of your employees. That’s why we built our Spending and Savings Accounts to help your employees establish impactful solutions to help them manage their daily expenses while developing healthy savings habits.