Savings refers to the money left over after a person has deducted their consumer expenditure from their disposable income over a period of time. After all expenditures and responsibilities have been paid, savings signifies a net excess of cash for a person or family.

Savings are retained in the form of cash or cash equivalents (such as bank deposits), which have no danger of loss but offer similarly low returns. Savings can be increased through investing, but this means putting the money at risk.

Savings: An Overview

The amount of money left over after spending is referred to as savings. People may save for a variety of reasons, including retirement, a child’s college education, a down payment on a home or automobile, a vacation, and a variety of other things.

Savings are frequently set aside for unexpected expenses. Sasha, for example, earns $5,000 every month. A $1,300 rent payment, a $450 car payment, a $500 student loan payment, a $300 credit card payment, $250 in food, $75 in electricity, $75 in mobile service, and $100 in petrol are among the expenses. Sasha’s monthly income is $5,000, and her monthly expenses are $3,050, leaving her with $1,950 in savings. If Sasha saves this money and subsequently has an emergency, she will have enough money to survive on while the problem is being resolved.

One might be considered to be living paycheck to paycheck if they are unable to save. If such a person has an emergency, they may not have enough money saved to get by, and they may end up in debt or bankruptcy.

Also Read: What are Debt Funds, exactly?

Savings Account Types

Banks provide a variety of savings accounts, each with its own set of benefits and restrictions. It’s worth noting that all bank savings accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor and per institution.

Accounts of Savings

A savings account offers interest on money that isn’t used on a daily basis but is kept on hand in case of an emergency. Deposits and withdrawals can be done online, over the phone, over the mail, or in person at a bank branch or ATM. Savings account interest rates are generally modest, although they are typically greater than checking account interest rates. Because they provide a greater interest rate, the finest savings accounts are frequently located online. High-yield savings accounts, such as online-only accounts, can pay up to 20-25 times more interest on deposits than the national average.

Also Read: What Is an Index Fund ?

Accounts Checking

A checking account allows you to make checks and use debit cards to take money out of your account. Checking accounts offer lower interest rates than other types of bank accounts, and many of them don’t pay any interest at all to checking account holders. Account holders, on the other hand, receive extremely liquid and accessible money in exchange for little or no monthly fees.

Investing in Money Market Accounts

A money market account (MMA) is a bank or credit union account that pays interest (not to be confused with a money market fund). MMAs often provide a greater interest rate than ordinary passbook savings accounts, and they also allow you to write checks and use debit cards. These accounts may also have limits that limit their flexibility compared to a traditional checking account. 

Deposit Certificates (CDs)

In return for a higher interest rate, a certificate of deposit (CD) restricts access to funds for a certain length of time. The interest rate on a deposit ranges from three months to five years; the longer the time, the greater the rate. Early withdrawal penalties on CDs can wipe out any interest received, so it’s preferable to maintain the money in the CD for the whole period. 56 It’s vital to shop around for the greatest CD rate if you want to get the most out of your money.

Also Read: What is Personal Finance?

How Do You Work Out Your Savings Rate?

The percentage of disposable personal income that is retained rather than spent on consumption or responsibilities is referred to as one’s savings rate.

Assume you have a net income of $25,000 per year after taxes (i.e., your disposable income), and you spend $24,000 on consumption, bills, and other expenses throughout the course of the year. You’ve saved a total of $1,000. When you divide your savings by your disposable income, you get a savings rate of 4% = ($1,000 / $25,000 x 100).

Investing vs. Savings

People sometimes confuse the terms saves and investment, for example, when saving for retirement in a 401(k) plan, but this is wrong. Because money placed into these accounts is used to acquire securities such as stocks, bonds, and mutual funds, retirement “saving” is more correctly investing. Money is at risk of loss when it is invested, but this risk is compensated by positive predicted returns over time. Savings, on the other hand, are “safe” against any prospective loss by definition.

Furthermore, funds are very liquid and may be used right away (e.g. using a debit card to make a purchase). Investments, on the other hand, must be converted into cash before being used. This might take some time, and you could have to pay transaction fees. By definition, investments require a long-term time horizon in order for the money to grow and appreciate.

Savings FAQs