When interest rates on savings accounts hover near 0 percent, it's easy to see why so many people shrug off the question about where to park their emergency cash. Financially savvy people assume that they can get better returns by putting money in stocks or mutual funds instead of letting the it "languish" in a low-interest savings account. But everyone needs a place to keep some liquid cash.
Think of it this way: If you have your paycheck deposited into a checking account for paying bills, and sweep all your leftover savings into a retirement fund or an investment account, what will you do when you have an emergency like:
Your car breaks down and needs a costly repair the same week that you're paying your mortgage and an estimated tax payment.
Your condo association informs all owners that the cost of repairing the roof of the building after a rash of storms has depleted the condo reserves, and therefore all owners are required to pay a special one-time assessment.
Your child gets sick and needs an expensive medication, but you just dipped into the cushion in your checking account to pay the previous month's doctor's bill.
When you need cash fast, most options come with undesirable side effects. Pulling money out of an investment account can take time and sometimes incur penalty fees and taxes. On top of that, you could be forced to sell investments at an inopportune moment. Using a credit card can mean you're borrowing money at an average interest rate of 15.61 percent, according to Bankrate.
A savings account provides the necessary back-up funding for your checking account and give you the peace of mind that you don't need to rely on credit or tap into your investments when the unexpected occurs.
And while its low interest rates means that a savings account is not the go-to investment for future expenses (the "future" being anywhere from next week to five years from now), it is the right place for cash to serve as a safety net for unexpected expenses as well as a temporary parking spot for planned future purchases. That said, keeping your cash accessible doesn't mean settling for zero interest.
Why Compare Savings Accounts
A recent survey by MagnifyMoney.com revealed that 73.4 percent of Americans with savings accounts keep their money in a traditional savings account that currently pays interest rates close to 0 percent, and of those who have a savings account, the average balance comes to $28,696.
By shopping around among bank, credit union and online-only savings accounts, you can find one that will increase the interest you earn, lower your fees and still meet your needs.
%VIRTUAL-article-sponsoredlinks%The survey showed that millennials are more likely to have an online savings account (18.8 percent vs. 13 percent of non-millennials) and they're also more open to considering an online-only savings account (55.1 percent versus 28.2 percent).
Internet-only accounts often pay 0.9 percent or more on savings, according to MagnifyMoney, while bank savings accounts are paying as little as 0.01 percent. Switching from a traditional account to an online savings account means that the average American (with that $28,696 balance) would earn more than $250 a year on their cash stash instead of settling for just $5 a year in interest.
Fees. Some savings accounts charge fees unless you meet minimum balance requirements or have established direct deposit. Any fees will cut into the limited interest you earn.
Interest compounding. For the maximum interest earnings, make sure interest is compounded daily.
Overdraft protection. If you're concerned about overspending on your checking account, make sure you can link the savings account to provide overdraft protection.
Account set-up. If you're interested in saving for a variety of specific goals, such as a vacation or a down payment on a house, you may want to look for an account that allows you to set up sub-accounts so you can more easily track your savings.
Availability of funds. Find out how quickly any deposits are credited and how long it will take to transfer from one account to another. Accounts within the same bank usually allow instantaneous transfers, but some online-only savings accounts can take a day or so to complete a transfer.
Check on Federal Deposit Insurance Corp. insurance. While most savings accounts are FDIC-insured, take a moment to double-check on the insurance so that you don't risk losing your money. One of the main benefits of a savings account is the lack of risk.
Check the rules on withdrawals. Most savings accounts and money market accounts limit their customers to six withdrawals per month. Find out what happens if you make too many withdrawals.
Checking out the requirements and fees on multiple online-only accounts takes a few extra minutes longer than just opening a savings account at your usual bank. But if that time results in increased interest earnings of several hundred dollars per year, it's definitely worthwhile.
Michele Lerner is a Motley Fool contributing writer.
8 Old Wives' Tales That Keep You Poor
You Need a Savings Account - and You Deserve a Better One
On one level, this is absolutely true. Real wealth, when not inherited, typically comes from starting your own business, but that is difficult when you have nothing. But too many people assume that they can't make things happen unless they're well-financed. "Most of the millionaires or billionaires I've interviewed over the years have bootstrapped it," Siebold said. "Most start with close to nothing. Of the self-made rich, most started off poor or middle class. They've put it on credit cards or borrowed it from family. It takes ambition, and it takes belief that it can be done. It really starts with the self-belief that it's possible. Most people are taught that it's not really possible for them unless they're blue blood or they went to Harvard or Yale. The mythology doesn't match the facts."
"The implication is that money is not made easily and it doesn't come for nothing, which is true technically," Siebold said. "This belief sets people up to believe money is scarce and difficult to earn, instead of seeing money as abundant and earning it is as easy as solving a problem through persistent, creative thought. Figuratively speaking, money does grow on trees; and the trees are ideas." Put those ideas into practice, and you might be surprised how much money the idea tree can grow.
Siebold called it the "It's the old 'trading time for money' [idea] that we're taught." "The average person believes the only way to make more money is to work more hours." But if you limit making money to selling your time, you're limited to what you can make, because there are only so many hours in a day, week, month or year. "I consult with big corporations," he said. "These are some of the big companies in the world. When I ask audiences, 'What's the best way you can think of in your role to make more money,' they'll say, get an MBA. Even at that level, they're trained to trade time for money. College professors don't have money. Even the ones that teach finance don't have any money. This creates the belief that making money is a linear process directly connected to time. Big money requires thinking about it in non-linear terms."
"The real saying is actually 'the love' of money is the root of all evil, but has been misquoted for centuries that most people believe money itself is the root of all evil," Siebold said. "That's where the church comes in to disempower people to make money. It creates a disempowerment cycle that makes people more reliant ... on institutions. Decide to be proud of your ambition and ignore people who tell you that wanting to be rich is wrong."
"Get your piggy bank out and save your pennies," said Siebold. "This is a very dangerous belief as it put a major emphasis on saving. Saving in itself is not bad, but the masses are so focused on clipping coupons and living frugally that they miss major opportunities. People must reject this nickel and dime thinking and focus their mental energy where it belongs: on the big money." In other words, why save pennies when you could be making dollars?
This is another saying that is true in one sense but misleading in a more important way, according to Siebold. "You don't get rich to get happier; you get rich for the freedom in brings." If you're unhappy with money, being rich won't of itself change that. But you could have "more freedom, more options, more choices." And, as he pointed out, most people have no idea what it's like to live without financial worry. Being less unhappy is certainly a step in the right direction.
"This is usually a harmless phrase when people just want to know what's on your mind, but be careful," Siebold warned. "If overused and it penetrates the subconscious, you'll start giving away your intellectual property for practically nothing. Your IP and unique perspective can potentially be worth millions if packaged properly." Look at the number of famous 20th century musicians who sold their music rights for a figurative song and were left destitute even as music publishers made millions. Compare that to Paul McCartney and John Lennon, who kept their rights and built multi-million-dollar fortunes.
"[There's an] idea that there's some kind of nobleness is being poor," Siebold said. A rich man isn't going to go to heaven. I'm not a good person because I'm not ambitious. I don't want to make money so I can be good. It sets [people] up to fail. The masses are programmed from an early age to put the needs of others before their own. There's a reason on a plane to say put your oxygen mask on first. In order to make a lot of money, there is a period of time in the beginning of the wealth building process where you must focus on yourself and your business in order to make it at an uncommon level. Once you acquire wealth, then you can volunteer or give back to charity."