Investing in Savings Accounts

Introduction

Many people do not consider savings accounts as an investment. However, savings accounts qualify as an investment channel. An investment is any money set aside for a future purpose with the expectation of earning returns on the capital. You can set aside your money in a savings account, and it will earn returns for you. Therefore, savings accounts are investments just as stocks and real estates are investments.

Features of Savings Accounts

A savings account is an interest-bearing deposit account you can open with a bank or credit union that allows you to keep some money away as emergency funds or for some future purchase.

Below are some features of a savings account:

• Interest-bearing Account: A savings account earns interest. However, the rate of return on a savings account is low compared to CDs (certificates of deposits), mutual funds, stocks, etc.
• Deposit Account: A savings account is a deposit account. You can transfer funds from your checking account to the savings account via an ATM, direct bank transfer, or online banking.
• High Liquidity: Unlike Certificates of Deposits, you can withdraw money from your savings account at any time (limited to six withdrawals per month) without extra fees.
• Rate Varies with the Federal Funds Rate:  The interest rate banks pay on savings account varies directly with the federal funds rate.
• Interest is Taxable Income: The interest you earn on a savings account is subject to taxation.
• Minimum Balance: Some banks or credit unions will require a minimum account balance on savings accounts.
• Insurance: Savings accounts with a bank are FDIC-Insured (up to $250,000 per account). Savings accounts with credit unions are also NUCA-insured.

Pros of Savings Accounts

There are certain advantages to investing your money in savings accounts. Below are some of them:

• Easy to set up: Setting up a savings account is super easy, especially when you use the bank where you operate your checking account.
• High Liquidity: A savings account allows you to make up to six withdrawals per month.
• Suitable for emergency funds and short-term goals: Because of the high liquidity, you can use it as one of the channels for your emergency funds or save money for a short term goal (e.g., buying a car)
• Multiple Savings Accounts: You can operate multiple savings accounts with separate banks or credit unions.
• Insurance Coverage: The funds in your savings account are FDIC-Insured (up to $250,000 per account) or NUCA-Insured as the case may be. This makes savings accounts low-risk investments.
• Easy to operate: There are no complexities involved when operating a savings account. Many banks or credit unions do not charge monthly fees on your account.

Cons of Savings Accounts

However, there are also some downsides to investing in savings accounts. Below are some of them:

• Low-Interest rate: Savings accounts do not pay high interest. According to the FDIC, the current national average interest rate (APR) is 0.09%. Though the high liquidity and low-risk features compensate for the low rates, it is still a disadvantage.  
• The other side of high liquidity: While high liquidity makes it a good investment for short-term goals and emergency funds, it also has a downside. There is always the temptation to liquidate the money, thereby forfeiting the initial investment goal. It takes a higher level of discipline to grow your wealth with savings accounts. 

High-Yield Savings Accounts

However, some savings accounts offer higher interest rates. These are referred to as high-yield savings accounts. Some high-yield savings accounts earn interest rates 20-30 times the national average (0.09%).

So what is the deal with these high-yield savings accounts?

• Online banks offer many of the high-yield savings accounts. These banks have lower overheads (rent, office equipments, etc.), which makes it easier for them to provide higher rates on savings accounts.
• Fees: Some of the banks or credit unions offering high-yield savings accounts will charge monthly fees
• Promotional Offers: Some of these high-interest rates have a window. They don’t last indefinitely.
• Account Requirements: Many of these savings accounts have minimum and maximum balance requirements

Shopping Around

It is still possible to get high-yield savings accounts that do not come with fees or account requirements. What you have to do is shop around on the internet.

To make your work easier, Investopedia compiles a list of the best high-yield savings accounts available. They update the list every month. Another good thing about the list is they tell you the features of the account, so you get a heads-up in case of fees and account requirements. Currently, Fitness Bank pays the highest interest rate at 2.10% APR.

Savings Accounts versus Money Market Deposit Accounts

Another alternative to savings accounts is money market deposit accounts.

Money Market Deposit Accounts are similar to savings accounts. However, they pay a higher interest rate and include some features of a checking account (limited no of check and credit card purchases). They are also FDIC-Insured or NUCA-Insured. The current national average interest rate is 0.18% APR for accounts under $100,000 and 0.29% APR for accounts over $100,000.

One downside of these accounts (when compared to savings accounts) is that they have higher minimum balance requirements. Some of them also charge high fees though it is possible to get many money market deposit accounts without any fees. While money market deposits accounts pay higher interest, they have lesser liquidity with the minimum account requirements.

Choosing between a savings account, a high-yield savings account, or a money market deposit account has a lot to do with the individual.

If you want the highest interest rates, a high-yield savings account is your best bet.

If you want the highest possible liquidity, a savings account will do. However, if you do your research, you will find high-yield savings accounts without minimum or maximum requirements. (Refer to the Investopedia Page)

Conclusion

Savings accounts are good investment channels for emergency funds (a portion of the funds) and other short-term financial goals. While the rate of return is low, liquidity is high, and risk is at the barest minimum. 

When making your financial and investment plan, savings account are sound investment channels you should consider.