There’s much to be uncertain about these days, and that has trickled down to the way we handle and invest our precious, hard-earned dollars.
The savings account has always been a time-tested standby, an easy and accessible vehicle to park your extra money for future needs. While COVID-19 continues to leave economic turmoil in its wake, more people are looking to this old favorite account to stash their cash, but is it the right move to make in a low-interest rate environment?
“Interest rates are at historic lows and are expected to remain low for some time,” says Jay Abolofia, founder of Lyon Financial Planning outside Boston and a certified financial planner. “In general, this is good for borrowers and bad for savers.”
Savings account rates are declining
“One of the primary drivers of the declining rate environment is COVID-19,” says Chris Abrams, the founder of Abrams Insurance Solutions, an independent insurance and financial services company. “In response to the global pandemic, the Federal Reserve has decided to cut interest rates to near zero. Although this has benefited the economy in many ways, it has also led many banks to reduce interest rates for savers.”
So, why would anyone consider a savings account in such a climate?
“Even with rates so low, a bank savings account can serve a critical role in your overall cash management strategy, primarily because of their liquidity and deposit insurance,” Abolofia says.
Best uses for a savings account — even if rates are low
Although not ideal for every scenario, a savings account can be just the vehicle you need in some unexpected life situations.
“Having a solid emergency fund will help you avoid a situation where you need to sell stocks that have dropped in value to pay for unexpected expenses,” explains Scott Schleicher, senior financial adviser at Personal Capital, an Empower Company. “A common rule of thumb is to save between three and six months’ worth of non-discretionary living expenses in an emergency fund. This includes expenses like your mortgage or rent, utilities, insurance, groceries and transportation.”
There are other times when a savings account can be helpful.
Keeping your money close
When it comes to withdrawing your money, savings accounts can make it easier than other products.
Unlike a certificate of deposit, you can withdraw money from your savings account without paying a penalty fee, for example. This feature is especially important when it comes to unexpected emergencies. If you need a new car tire, you want your money at your fingertips.
It’s a temporary fix
“When we talk about using savings accounts versus other investment vehicles, we look at it in terms of time horizon buckets and when you may need the money,” says Gilles Hudelot, director of education for the Mentoro Group, a financial wellness education firm. “Anything that might be needed in one to two years would be in the short-term bucket. This includes emergency funds and short-term savings goals such as Christmas, vacation savings or expenditures you know are coming soon. The risk of that money going down in an investment account doesn’t outweigh the possible gains you might get.”
Because savings accounts are insured by banks and credit unions, they offer less risk than what you would face with other investments. They are insured by the government. If your bank shuts down, the government will cover up to $250,000.
A savings account can store cash intended for a number of purposes, such as a down payment for a new property or a new car.
Situations when a savings account doesn’t make sense
Even with all of its benefits, a savings account is not for every scenario.
If you are setting money aside for a long-term savings goal (like retirement), you will want to consider strategies that will help you earn more money, like investing it.
If you don’t meet the account’s thresholds, the savings account won’t be right for you.
“Most savings accounts today will have a minimum balance requirement, which means if the account balance falls below the minimum amount, the account will incur charges or fees, which can rob your account of its interest rate that is earning,” says Juan Carlos Cruz, founder of Britewater Financial Group in Brooklyn, New York. “Use of a savings account for the purpose of retirement and that low interest rate may not help keep up with inflation.”
Little purchase power
“A savings account should not be used to house anything more than an emergency savings,” says Jacob Dayan, CEO and co-founder of Community Tax. “If you’re looking to save for any future financial goal, there are a lot of better options to maximize your money. Bonds, CDs, Treasury bills and notes best suit the risk-averse. For those who can take on more risk, there are great options such as index funds and blue-chip stocks. These options are much better suited than a savings account where you can put your money to work and earn higher returns.”
When will rates increase again?
The degree of volatility in today’s financial markets has made many Americans feel uneasy about their money. One major question plaguing would-be investors and savers is when will rates increase again? The short answer? Not any time soon.
“The Fed doesn’t plan on raising interest rates until 2023,” says Brighwater’s Cruz. “The economy is fragile, and while the economy is in this state, the Fed will continue to keep interest rates very low.”
A savings account may not be ideal for every situation, such as saving for retirement. Savings accounts, however, can be a fantastic tool in your financial arsenal when you need short-term savings close-by and secure.
“Savings accounts are like parachutes,” says Roy Ferman, Founder and CEO of Seek Capital. “Your finances might end up in a free-fall whether it is from debt, loss of income, or a life-threatening virus that stopped the world,” he says. A savings account will serve the purpose of catching your fall.”