What Does a Savings Account Do?
If you are looking for a simple way to keep your money safe while still having access to your money whenever you need it, a savings account is a smart choice. You can use a savings account for several purposes, from building an emergency fund to teaching your kids about the value of regular saving.
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Keeps Your Money Safe
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One of the chief advantages of a savings account is its safety. If you use a bank insured by the Federal Deposit Insurance Corp. or a credit union insured by the National Credit Union Administration for your savings account, your money is protected up to a limit of $250,000, as of March 2011. That safety is critical as you save for short-term goals, and it is one of the best reasons to use a savings account as opposed to a bond fund or stock market investment. When you invest for the long term, you have time to ride out any bumps along the way, but when your goals are shorter term, you cannot afford to put your money at risk.
Helps You Build an Emergency Fund
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Every worker should have an emergency fund equal to at least three to six months worth of living expenses, and a savings account is an excellent vehicle for that fund. With a savings account, you get absolute safety of your principal, but you also get ready access to your money whenever you need it. That makes a savings account an excellent way to build the emergency fund you need to protect yourself from a job loss or other financial shock.
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Provides You With Current Income
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Savings accounts typically earn interest, although the percentage is often low. Even so, you can use a savings account to provide you with current income, or to build up your savings. A savings account is also a good way to introduce young people to the concept of saving and investing. You can set up a savings account for your son or daughter and have the child direct a portion of every cash gift into that account.
Automates Your Saving
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You can use a savings account to automate your saving program and implement a pay yourself first strategy that can help you learn to live beneath your means. The easiest way to implement that automatic savings strategy is to split the direct deposit of your paycheck between your checking account and your savings account. That forces you to live on the money you have left and helps you budget your funds more effectively. You can start by directing as little as $5 to your savings account, then slowly increase the amount going into the savings account as you get better at managing your money.
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References
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