If you think ‘Savings account’ is where you keep your savings, think again. In this blog, you will learn that savings account is actually a transaction account with direct fees and indirect costs. Learn about the good, the bad and the ugly of the savings account.
Good for convenience
Use a savings account to meet your day-to-day banking needs.
Having a savings account is like having a home with an address. To do anything in the real world, you need a physical address. Similarly you need a savings account to do anything in the world of money. This includes getting your salary, paying your bills, withdrawing money from ATM, using credit cards for purchases, investing in various schemes and so on. In other words, savings account is a transaction account that you use for day-to-day money transactions.
Bad for investment return
Inflation has always been more than typical 4% interest you get with a savings account
If you think savings account is meant to put your savings, think again. The interest you get (typically 4%) is far lower than rate of inflation. As a result, your money in the saving account loses purchasing power with time. The fundamental goal of saving is to make a positive real return – a return that is more than the rate of inflation. With negative return of savings, I would recommend you to keep only the minimum balance required and put the rest of your spare money in a liquid mutual fund till you decide what to do with them. Liquid mutual funds typically produce a return that marginally beats the inflation.
Ugly if your account gets hacked
Not advisable to keep your savings in the same account that you use for day-to-day transactions
Everyone knows that they should not keep valuables at their home. Keeping valuables at home attracts wrong people who will try to steal it from you. The same logic applies to your savings. Do not keep your savings in an account that you use for day-to-day transactions. Digital thieves (hackers, phishers and others) will try to cheat you. They may trick you to reveal your debit card details, may get your credit card details by hacking merchant’s site and so on. To avoid this, keep your savings away from the main transaction account and reduce the chance losing a lot of money if the account gets hacked.