Safety in savings accounts

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Savings accounts, long a mainstay of many people’s financial lives, may no longer be a good deal.

That’s according to a recent report, “The hidden cost of savings accounts,” by Christina Couch, who writes that “savings accounts can burden consumers with low return rates, hidden fees and surprise penalties.” The story suggests that consumers might want to consider riskier investments as alteratives to savings accounts.

Indeed, there are at least two good reasons to avoid savings accounts: The high opportunity cost of measley returns due to miniscule interest rates and the various fees banks charge customers to open and maintain these accounts, especially if the balance is relatively small.

But the alternatives, such as money market accounts or mutual funds, to name just two, don’t necessarily offer a better choice for consumers than a savings account.

Interest rates on money market funds are little, if any, better than the rates on savings accounts, and while both money market and mutual funds offer liquidity, they also involve two big disadvantages: The principal is at risk, and the accounts aren’t protected by the Federal Deposit Insurance Corp.

A savings account may offer a poor return, but apart from any fees, the money in that account is safe and saved, up to the FDIC limit of $250,000 per depositor. Your $500 won’t suddenly turn into $400 or $250, even if the bank deducts an annual fee to maintain the account.

Moreover, if the amount balance meets the bank’s minimum requirement, the account may be free, and if the savings account is linked to a checking account, the fees on that checking account may be reduced or waived as well.

The bigger question for many savers is not how much they can earn on their savings, but how they can protect that money they’ve set aside. Savers who have secure employment, manageable expenses and other funds for an emergency may be inclined to take bigger risks with their savings to try to improve their returns and avoid the fees. But savers who’ve accumulated just enough to pay for car repairs, medical bills or other family emergencies may not want to expose those savings to any risk, even at the cost of the fees and loss of the potentially higher return.

So what’s your strategy? Savings account or no savings account?