5 Reasons to Open a Separate Savings Account

A checking account (US) or current account (UK) will normally be the main day to day banking account that individuals will use to manage their current banking needs. However checking/current accounts generally offer very low interest rates even if you maintain a large balance, so it’s not surprising that most people choose to also open a savings account to cater for any surplus money that they have. There are lots of reasons why it’s advantageous to have at least one separate savings account but let’s look at the five most compelling reasons:

Maximize savings interest:

Savings accounts are designed to provide a healthy return on money that is lodged with them and the best savings accounts will almost always offer a far higher interest rate than you would get if you left your money in your checking account. It’s worth remembering that inflation reduces the real value of money so it’s crucial to ensure that your surplus money is in an account that pays out a rate that is higher than inflation.

Benefit from tax-free savings concessions:

Governments often encourage citizens to save by offering tax-free savings concessions. For example, in the UK savers (as at the 2011/12 tax year) can put up to £10,200 per year into an Individual Savings Account and earn tax-free interest. Tax concessions don’t apply on checking/current accounts so not having a separate savings account will mean you are giving more money to the taxman than you are required to do.

Reduce the temptation to spend your saved money:

Checking accounts come with a debit card and are often linked to a credit card. This makes it very tempting to spend any money that happens to be in the account and you might find that your good intentions to save up a large sum get ruined as you get tempted into a spending splurge. Having your spare money carefully separated in a savings account can help you to treat that money as different. It is money that you have set aside to meet some future goal and you are not going to dip into it to cover day to day costs.

Provide a contingency fund:

When times are hard, such as during a turbulent recession, the last thing you need is for some unexpected emergency to occur that requires to be funded. Having at least three months worth of income held back in a high interest instant access savings account is the perfect way to guard against such a threat. If no emergency occurs, then you benefit from the good savings interest rate but you have the comfort of knowing that you have that fund available should it be required.

Security of your money:

As already mentioned, checking/current accounts usually come with a debit card and may be linked to a credit card. This means that there is a risk that a fraudster might compromise your card and withdraw funds from your account. Savings accounts, on the other hand, can be provided without cards and it would therefore be more difficult for a fraudster to illegally gain access to savings funds.

Opening a savings account is extremely straightforward and every person who has a checking account should also open at least one savings account. They provide a mechanism to start to build for a better future, whether that be saving for a future mortgage deposit, or saving to fund your retirement. The best savings accounts offer a good rate of return and it certainly beats keeping your money in your checking account or, even worse, stuffed in a mattress in your house!