What is a Basic Savings Account?
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A basic savings account is a bank account designed to help individuals store money securely. The basic savings account is ideal for short-term savings and emergency funds, offering minimal risk and easy access to funds.
The interest paid is typically very low, ranging from 0.01% to 0.5%, depending on the financial institution.
In many countries, funds in savings accounts are protected by a governmental insurance that will protect the account owner from financial loss if the financial institution become insolvent, ensuring safety against firm failures. In the United States, funds in savings accounts are insured by the FDIC (Federal Deposit Insurance Corporation) for banks and by NCUA (National Credit Union Administration) for credit unions, up to $250,000.
A basic savings account is a simple, low-risk way to store money. It’s perfect for short-term savings goals or emergency funds, offering security and easy access to your money. While interest rates may be lower than other accounts, the account’s safety and convenience make it a popular choice for those looking to safely store their funds.
Key Features of a Basic Savings Account
- Low Interest Rates
Basic savings accounts have low interest rates. The interest you earn compounds over time, but it’s typically less than in high-yield savings accounts or investments. If the general financial climate is low-inflation and low-interest rates, the interest rate on a basic savings account can be nearly zero. - Security
The basic savings account is considered a safe place to store money. In many countries, the are included in the list of savings accounts that are insured through mandatory insurance, making them a highly secure way to store money as long as you stay below the insured treshold. In the U.S., the FDIC insures up to $250,000 per depositor for a basic savings account in a bank. For saving acocunts in credit unions, there is similar insurance in place through another entity. With this type of insurance, your savings are protected if the bank or credit union fails. This feature makes basic savings accounts one of the safest ways to store money. - Liquidity
Savings accounts offer easy access to your money, making them perfect for short-term savings goals or emergency funds. In the United States, Federal regulations (Regulation D) limit the number of certain types of withdrawals or transfers to six per month from a basic savings acccount, although ATM and in-person withdrawals typically don’t count toward this limit. In the United States, many people have a separate checking account for their day-to-day transactions, to avoid reaching the limit for their basic savings account. - Minimum Balance Requirements Some (not all) basic savings accounts require you to maintain a minimum balance to avoid monthly maintenance fees. These requirements vary widely from a very low level to several thousand dollars. Failing to meet the minimum could result in monthly service fees, reducing the overall value of your savings.
- Low Fees
Most basic savings accounts charge low or no monthly fees, particularly if you meet certain conditions, such as maintaining a minimum balance or making a set number of deposits. This makes them an attractive option for people looking to save money without paying a lot in bank fees.
Pros of a Basic Savings Account
- Safety and Security: With insurance, basic savings accounts are a safe place to park your money, protecting it from market fluctuations and other financial risks.
- Ease of Access: You can withdraw or transfer funds when needed, making it a great option for an emergency fund. (Special rules apply in the United States.)
- No or Low Fees: Many banks offer basic savings accounts with minimal fees, especially when account holders meet certain criteria.
Cons of a Basic Savings Account
- Low Interest Rates: The interest earned on a basic savings account is relatively low, meaning your money doesn’t grow as quickly as it could in higher-yield accounts or investments. For long-term savings, inflation may outpace the interest rate, making your savings lose in value.
- Limited Transaction Options: Withdrawals and transfers may be limited by law in some countries, including the U.S., making it inconvenient for people who need frequent access to their funds.
When Should I Use a Basic Savings Account?
A basic savings account is ideal in many situations, including these:
- When you want a safe, low-risk way to store money.
- When you are saving for short-term goals, such as an emergency fund or a vacation that will take place fairly soon.
- When you need to have very easy access to your funds, e.g. your emergency fund.
- When you do not want the increased risk involved in investment accounts.
- When you have low balances or are just starting to build your savings.
How Much Should I Keep In My Basic Savings Account
Since the interest rate is low, it is not a good idea to use your basic savings account for large amounts of money that could be earning a better interest in another type of account – or be invested for a possibly even higher yield.
It is not possible to give any specific numbers, since so many factors play a role here, such as your mandatory monthly expenses, your tolerance for risk, and how quickly you can access funds kept in higher-yielding bank accounts or investment accounts.
Many experts recommend having enough savings to pay your necessary monthly expenses, such as rent and food, for 3-6 months. This money need to be kept in a way that you can access it easily, so how easy you can access money kept in another account with better interest than your basic savings account will play a role here. Some individuals prefer to keep one month of madatory expenses in their basic savings account, and the rest in an account that pays better interest. If you run into economic difficulties, you can easily access enough to pay for one month, and start making preparations to access the rest as necessary.
Your tolerance for risk will also matter. Some people prefer to keep minimal savings in money, and invest as much as possible in other ways, while making sure that at least some of those investments can be liquidated quickly if necessary, e.g. publicly traded stocks. Others have a lower tolerance to risk and prefer to keep money in bank accounts, including a basic savings account and at least one higher-yielding bank account.
Alternatives to Basic Savings Accounts
If you’re looking for better returns on your savings or more features, there are other accoun types to consider, such as:
- High-Yield Savings Accounts (also known as High-Interest Savings Accounts) can offer significantly higher interest rates than basic savings accounts.
- Money Market Accounts provide better interest rates and often allow check-writing privileges, but may have higher minimum balance requirements. Money Market Accounts are especially popular in the United States.
- Certificates of Deposit (CDs) offer higher interest rates than a standard savings account, but you must lock your money in for a set period, and an early withdrawal can result in a penalty.