If you find you’re living paycheck to paycheck, you should know that you’re not alone. This summer, Harris Poll, together with CareerBuilder, determined that 78 percent of working Americans are just scraping by until they receive their next paycheck.
Surprisingly, a low income isn't the problem for many of the survey respondents, since 10 percent of working Americans making over six figures reported that they felt they were living paycheck to paycheck and 28% of those earning between $50,000 and $99,000 felt the same way.
So, what's the problem? According to the survey, a large portion of working Americans are in debt. Roughly 75 percent of Americans, in fact, and a depressing half of working adults believe they will be in debt the rest of their life. Additionally, only a quarter of the survey respondents were saving money on a regular basis. With these two things combined, it is no wonder that so many are struggling to get ahead.
When it comes to achieving financial success, or finally shaking off the habits that are keeping you stuck in your paycheck-to-paycheck lifestyle, there is plenty of advice out there on paying off debt quickly or making more money. Still, we can all agree on one thing that has to happen to get ahead — you have to save more money than you spend.
This is where a great savings account comes in handy. A savings account can be used to set up an emergency fund, an account you can use to prepare for unexpected expenses like car repairs or medical bills. It can also be used to plan ahead for the purchases you've been guilty of charging in the past, like a weekend getaway. No matter what your goals are for your financial future, you can't ignore the usefulness of a simple savings account.
When should you use a savings account?
A few years back, U.S. & World Report News suggested that American earners needed to ditch savings accounts altogether. Their reasoning was solid; they argued that many online checking accounts are offering high-interest rates, making them a better choice for saving cash. This raises the question— when are savings accounts a worthwhile choice?
Adding a savings account is generally recommended as a way to set aside money, according to Chantel Bonneau, a wealth management advisor with Northwestern Mutual. It may be true that some checking accounts have great interest rates, but most also come with a minimum number of purchases you need to make during each statement period. This setup can prove cumbersome to those who are trying to break old habits of spending what they should be saving. A savings account is an ideal choice for someone who needs to clearly divide what they should save and what they can spend.
“I would recommend utilizing a savings account and checking account to differentiate the purpose of the money,” suggests Bonneau. “For example try to make your savings account represent dollars that are meant for just that—savings.”
Additionally, savings accounts offer a lot of security. The FDIC insures savings accounts for up to $250,000, so you can trust that when you deposit your money in an account at a reputable bank, it will be safe until you are ready to use it.
When shouldn’t you use a savings account?
Although savings accounts are great tools for stashing a little money away, they are not always the right choice for your money. Sometimes, there are better options for saving than a traditional savings account.
If you need access to your money on a fairly regular basis, a checking account may be a better choice. Most savings accounts have limits on how often you can make a withdrawal, and if you can't stick within those limits, you're probably going to be slapped with fees, and you might even have your account closed. If you plan to make regular withdrawals, try a checking account instead. Even if you want to create a separate account to earmark money for a specific purpose, there are free checking accounts available online for that purpose.
On the other end of the spectrum, a savings account isn't the right choice for long-term savings, like retirement. If you plan to leave your money be, upping your contribution to your employer-sponsored 401K or opening an IRA is a better choice.
“An IRA should be for funds meant for retirement,” says Bonneau, who added that savers should be aware that how much they can contribute to an IRA and receive a deduction is influenced by how much you are making each year and how much you are contributing to your employer-sponsored retirement plan. For more information on retirement contribution limits, check out a chart that outlines the rules at BankRate.
What about alternative savings accounts?
Using a traditional savings account isn’t your only option if you want to have access to your savings in the near future. If you have the ability to leave your money be for an extended amount of time or can make a large, initial deposit, an alternative account might be a better choice. For the most part, savings accounts will have a lower interest rate because they offer the advantage of having access to your money whenever you want, while a Money Market Account or Certificate of Deposit have a different set of rules.
“A Money Market Account generally receives a slightly higher interest rate than a savings account, but typically has a higher minimum account balance requirement,” Bonneau explains. “A CD, or Certificate of Deposit, has terms and rules that need to be followed. For example, you can pick a CD with a term of 30 days, six months, one year, five years, etc… Based on the length of the term you can usually get a slightly higher interest rate. In exchange for that, you cannot touch the funds during that committed term, or you usually forfeit the interest rate and sometimes incur a penalty.”
Choosing between the three is all about the plans you have for your money. For instance, if you're just socking a little cash away for your next vacation, a high-interest savings account with no minimum balance requirements is the best choice. If you have a larger amount of cash, a Money Market account is going to pay the most interest. And, if you don't plan to use for the next year or more, you might want to consider a Certificate of Deposit. It is worth noting that interest rates on CDs haven’t been great lately, so you should compare what is available to traditional savings accounts.
How can you find the best savings accounts?
If you’ve determined you are better off going with a savings account, the next step is finding the right account at the right bank. Thanks to the increased popularity of online banking, there are more options than ever before that offer good rates and have very few rules attached.
The first thing you are looking for in a bank, according to Bonneau, is one you know you can trust that works with your lifestyle.
“If you prefer a brick-and-mortar location that is in your neighborhood or if you want to be able to bank completely from an app, that might help you make a decision,” she says. It is worth noting, however, that brick-and-mortar banks may offer lower interest rates in comparison to online institutions.
Today's modern technology makes it very easy to find a trustworthy account. Your accounts should be FDIC Insured, but you can use the internet to do further research. For instance, we found one account with no fees and an amazing interest rate but read endless reports of bank customers struggling to make withdrawals or get straight answers from customer service representatives when they were having problems with their account. A little internet research will go a long way when you are selecting a bank.
Next, you want to pay attention to the fees associated with the account. Will you be charged if you make a withdrawal? Are the fees if your balance is below a certain amount? Consideration of fees is actually more important than paying attention to the interest rate, according to Bonneau.
Lastly, you should check out the interest rate before opening the account. We're in a low-interest rate environment, according to Bonneau, so the interest rate won't matter as much unless you are planning to carry a high balance in your account.
What do you need to set up your savings account?
A savings account is one of the easiest accounts to set up. In fact, they are even set up in a way that allows children to open them. You will need your social security number and a photo ID, like your driver's license or passport, when you set up your account. Most banks will require two forms of identification to open an account.
Additionally, even though many accounts do have a minimum initial deposit, you won’t earn interest if you don’t add anything to your account. Go ahead and bring along your first deposit with you when you open your account.
How can you make your savings account work for you?
Once you have an account set up, your last step is using it in a way that is beneficial for you. Prioritizing savings is hard, especially when you are trying to make progress on a tight budget. No matter how much you plan to save each month, the key is to come up with a plan and then automate it.
Setting up an automatic withdrawal is the strategy Bonneau suggests for forcing savings. With an auto-draft set up for the same day you get paid, you don’t have a choice on whether or not you’ll be spending that money each month.
So what if you're having trouble finding wiggle room in your budget to save? You're probably going to have to get creative, finding new ways to save money by reducing your fixed expenses. This can be done by cutting unnecessary bills like cable, cutting back on grocery spending, or carpooling to work to save on gas. You could even start selling your unused belongings to get a jump start on your savings.
How can you use the money you have saved?
Chances are, if you are saving your hard-earned pennies, you have a purpose in mind for the money you are socking away. Whether you are saving money in an emergency fund and have an unexpected car repair or you’ve been saving up to make a downpayment on your first house, making a withdrawal from your account should be simple.
Many banks provide a debit card with their savings accounts, which will allow you to withdraw money from an ATM. If not, you can make an electronic transfer to your checking account through your online banking account or visit a nearby branch to make a cash withdrawal.
Before you remove any money from your account, you should know that many accounts have rules about how you can make withdrawals. The standard rule is that you cannot make withdrawals more often than six times in a statement period without paying fees.
The Best Savings Accounts Out There
Sure, you can do a lot of searching for a savings accounts with no fees and a great rate, or you can let us do the work for you. Here are the best savings accounts out there, perfect for saving for your next vacation or socking away cash for your next car.
- CITBank: This FDIC Insured savings account has a 35 percent annual percentage yield and doesn’t come with any fees. You can do all of your banking online and deposit as much as $250,000 into the account. The only downside? You have to have a minimum of $100 to open the account.
- Synchrony Bank: An online bank, Synchrony seems to have one of the best deals available right now. Their online savings account has no minimum balance requirements, and you won't be charged a monthly fee. The best part? Their FDIC Insured savings accounts come with a 1.30 percent annual percentage yield.
- Barclays Bank: Barclays has a reputation for offering one of the highest interest savings accounts available. Their accounts don't come with any fees for withdrawals or low balances, and they offer an annual percentage yield of 1.30 percent. They also provide a tool called Savings Assistant, which helps you to automate your savings based on your unique financial goals.
- SavingPurely: Accounts with a 1.30 annual percentage yield with a $1 minimum balance and no fees. For each account opened, they will plant a tree as part of their partnership with Plant-it-2020.
- Pure Point Financial: If you have a large amount of money to put away, this high-interest savings account offers a high annual percentage yield of 1.30 percent to accounts with a $10,000 new deposit. As long as you meet their minimum balance requirements, there are no maintenance fees associated with the account.
- Goldman Sachs Bank: This online savings account offers a 20 percent annual percentage yield and a name with a reputation you can trust. There is no minimum deposit required to open, and this account is transaction fee free.