Checking & Savings Accounts

It has long been a truism of the market that savings accounts are a virtually worthless investment tool. Certainly, if one consistently has extra cash at the end of the month after bills are paid and other investment tools such as 401Ks and IRAs are fed and tucked safely into bed, a savings account, even with its minimal interest rate is probably a better place for a cash cushion than a checking account. After all, even less-than-one-percent interest a year is better than none at all, and it is generally possible to tie the accounts together in such a way that the cash can be accessed immediately when needed.

At the same time, the miniscule rate of return has meant that as an investment tool for retirement or college, the savings account was virtually useless. In fact, at recent interest rates, mathematically, savings would be worth less by the time the money was accessed, than when they were started. The only way for a savings account to make sense in preparing for the future was to have so much money that the interest rate was irrelevant.

Recent changes to various aspects of the market as well as the rise of new types of banks have changed this somewhat. This is particularly true with the volatility of the stock market, reduction in employer contributions to 401Ks and the decline of real estate as a guaranteed investment. While the average of 3% APR offered by high interest savings accounts is still not going to be enough to retire on in most circumstances, it is certainly wise to place at least a portion of one’s portfolio into such an account. The primary reason for this is that, like a checking account, any high interest savings account through a legitimate lender is FDIC insured, generally up to $250,000. This makes these investments far more secure than most of the other options out there. Whether stocks are up or down, this money will be protected, as will the accrued interest. There are even checking accounts which can earn interest for the holder, though the minimum balance on such is considerably higher than what most of us keep on hand.

It is unlikely that, barring a very early start, one can get rich or even comfortably retire on the returns from a high interest account, but as we are all advised to have 6-9 months of expenses saved up for a rainy day in any case, that money is worth putting in such a savings account. The peace of mind in knowing that the money is protected regardless is also invaluable.