The merits of a simple savings account

When I tweeted that ING raised their interest rates on some of their basic savings accounts for the New Year, some of my friends balked at the meager returns. I was a bit surprised — maybe just because I was kind of excited about the gain and here my friends were raining on my parade. It’s been brought to my attention by the “that’s it??” responses that maybe one of the biggest reason my peers don’t make use of savings accounts is they don’t actually know how useful they can be.

About the rates…
A good savings account will pay a percent interest that mirrors inflation. It is important to understand that interest rates are low right now because the market is down. In the past, they were much higher because the financial world wasn’t reeling from a near-fatal blow like it is now. As the market recovers, rates will continue to increase. High-yield savings accounts essentially return zero when compared to inflation, which is why they are NOT for investing — but this is also why it’s important to seek out the 2% from a bank like ING instead of the 0.2% from a bank like TD. It’s better to come out on par rather than at a loss.

If you start an account with ING with over $100 and use my referral key, you’ll get a $25 bonus. Hello? That’s a 25% return on your initial investment ;)

Savings ISN’T about making money!
It’s about having money, particularly for goals. If you want to go on vacation, you don’t save for it by buying stocks. Why? First, you want the money there when vacation time comes which isn’t always guaranteed by riskier higher return investments, and secondly, investing is expensive but saving is not. It’s not worth it (or really even very feasible, though not entirely impossible so don’t harp on me here) to buy $50 of individual stock per month, but in a savings account, that’s an ok contribution.

A little goes a long way…
Even if rates are low, they can add up. Every time my vacation fund gets interest paid out to it I think, “there’s a coffee I don’t have to buy on my trip!”. And it does add up. At first it’s just pennies, then it’s a dollar and a bit for a regular coffee, but then it gets to be enough to buy a latte, and finally you’re at the point where you can treat yourself and a friend to lattes & croissants, all courtesy of that pitiful rate of return. It’s not a lot, but for god sakes, it’s free money! Why would you say no to free money? (Free coffee!!)

A savings account is an excellent way to accumulate money for the purpose of investing.
Some investment vehicles have minimum buy-ins that can be anywhere from a few hundred to thousands or even tens of thousands of dollars. GICs? Usually start at a minimum $500. Stocks? Well if you want a chunk of Apple, it’s over $300 apiece. When I first bought mutual funds, I didn’t go in with $20 — I put $1000 down first. How did I accumulate $1000 to start investing? In a savings account. Buying big, long-term investments with a small amount and/or for the short term is a bad idea, so accumulating a sum with a few zeroes behind it is an absolute necessity if you want to use your money to make more money.

For long-term savings, you need (or should try) to make money. For short-term goals, you merely need to have money. Savings accounts are the best place to keep your money for purchases you’re planning to make within 0 to 2 years. This means things like buying a car, paying tuition, going on vacation, buying a computer, etc. You don’t need to get a return on this money, you just need it to be available in 24 months or less to buy something you want. Savings accounts are also the best place to keep your emergency fund, because you need that money to be readily accessible and not have any penalties for withdrawals.

If you’re saving up for long-range goals (more than 2 years from now), like buying a home or saving for retirement, then GICs, mutual funds, stocks, bonds, and other investment vehicles are better suited to your needs. There you can get a larger return on your money and temper out the consequences — such as fees or poor market performance — of withdrawing too soon. In the meantime, don’t neglect the basic savings account, it has a lot to offer you! And geez, get excited about 2%.