Emergencies, be they health or financial, can come into anyone's life at any time. And it can be difficult to deal with if you don't have saved enough money. Here having a savings account is an advantage. It allows you to save money from your earnings, which you can withdraw during such situations. In this article, you will discover the advantages and limitations of a savings account. But before moving further, let us understand what a savings account is.
Definition Of A Savings Account
A savings account is a user-friendly bank account offered by financial institutions. Its purpose is to help you deposit and save money. The best part is - you can earn interest on your deposits. With a savings account, you can keep some money intact for emergencies, ensuring you won't get stuck during such situations.
Importance Of Understanding The Advantages And Limitations
Understanding the savings account's advantages and limitation is important for achieving your financial goals. Let's put it this way; a savings account earns you interest on your balance, but the interest rate varies depending on the type of savings account. Understanding the advantages and disadvantages of a savings account will help you choose the kind of savings bank account that best suits your financial needs.
Advantages Of Savings Accounts
Safe and Secure storage of funds
Savings account are a safe, secure, and convenient mode to store your money. Banks offer various savings account options to keep your money safe yet available. These accounts come with specialised features and benefits, such as a high level of security and insurance on deposited funds. When checking the advantages of a bank account, be sure to compare the security features of different accounts to find the one that works best for you. For example, Digital Bank Savings Account and zero balance account
Interest Earnings on Deposited Funds
Another key advantage of a savings account is the interest earnings on deposited money. The interest earned from a savings account is a passive source of income that can help you increase your savings without much effort.
Liquidity and Accessibility of Funds
The money in savings accounts is readily available. It means you can withdraw your money anytime you wish. A savings account is helpful during emergencies such as medical expenses, home renovation, or any unexpected expenses.
Convenience and Ease of Use
Savings accounts offer advanced online and mobile banking services that provide ease and convenience to account holders. With a savings account, you are just a few clicks away from making a payment online or purchasing anything. All you need is a mobile phone and a stable internet connection, and you can use all the banking services.
Establishing a Savings Habit
Having a savings account can help you develop a savings habit. By depositing money regularly in your savings account, you can create a habit of saving. This can lead to long-term financial stability.
Limitations of Savings Account
While saving accounts provide many benefits, there are limitations too. You will need to consider these limitations before you open a savings account.
Relatively Low-Interest Rates compared to other investment options.
The main disadvantage of savings accounts is comparatively low interest rates than other investment options. The interest rate offered by banks in India remains between 2.5% to 7% per annum. Although this may seem appealing, it does not keep pace with inflation, resulting in slow growth of your money.
Potential impact of inflation on purchasing power
Inflation is the rate at which goods and services increase in price over time. As the value of money decreases, it can have a great impact on your purchasing power. As mentioned earlier, saving accounts provide an interest rate of around 2.5% to 7%; however, the inflation rate in India currently is approximately 6% to 7%. That means the value of your money is decreasing by 2% to 3% every year. Thus, in the long run, it may make your savings obsolete.
Account Fees and Charges
Saving accounts often come with fees and charges that may be inconvenient for some account holders. For instance, most banks require maintaining a minimum balance, and if you fail to, they charge a fee. Also, some banks may charge a transaction fee for every withdrawal you make at an ATM or a branch.
Limitations on Withdrawals and Transactions
Saving accounts also come with restrictions on the number of withdrawals or transactions you can have in a month. Most banks have a limit of around four withdrawals or transactions per month. This limitation may not be suitable for someone who needs to access their funds frequently.
Factors To Consider When Choosing A Savings Account
Interest Rates and Potential Earnings
Interest rates and potential earnings are the first things you must consider when opening a savings account. You should ensure you get the most return on your savings.
Account fees and charges
Some accounts come with hidden charges which can eat into your potential earnings. Be sure to read the terms and conditions before signing up.
Withdrawal and deposit limitations
Some accounts have a lower limit on the number of transactions per month. This limitation can be very inconvenient if you need frequent access to your funds.
Financial goals and time horizon
Finally, consider your financial goals and time horizon when choosing a savings account. If you are saving for a short-term goal, you may want to opt for an account with higher interests but limited withdrawal options. On the other hand, some might prefer more flexibility.
Benefits Of A Savings Account
How do you gain from having a savings account? The following are the benefits of a savings account:
Regular Contributions to the Account
Having a savings account encourages you to save on a regular basis. Over time, regular contributions to your account can add up to a significant amount of savings; this can help you reach your financial goals with ease.
Reviewing and comparing different savings account options
There are different types of savings accounts. These ensure you have a variety to choose from which is necessary to find the option that best suits your needs.
Automating savings through direct deposits or automatic transfers
Savings accounts allow you to automate your savings. You can do so by setting up direct deposits from your salary cheque or automatic transfers from your salary account. This ensures a certain amount of your income goes towards your savings on a monthly basis.
Now you know about the advantages and disadvantages of a savings account in detail. This information will come in handy to help you make an informed decision the next time you want to open a savings account.
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This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees, and contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.