Both investing and saving are vital financial behaviors. However, there is a significant difference between them. When you save money, you are putting it aside for future use. Investing money, on the other hand, is the process of purchasing assets that have the potential to increase in value over time. A savings account is an ideal place to keep your money. Savings accounts allow you to deposit funds and receive interest on your balance. These accounts can be opened with a bank or credit union. To open a new savings account, you should know a few things about how they function.
What is a savings account?
A savings account is a bank account meant to retain funds you do not intend to spend immediately. This is not the same as a checking account, a transactional account that allows you to write checks or purchase items, and ATM withdrawals with a debit card. Savings accounts enable you to save money for certain objectives and goals.
You may, for example, open a savings account to keep your emergency money or put a down payment on a property. When you're ready, you can take the money out of savings, although many banks and credit unions limit the number of withdrawals or transactions you can perform from a savings account. Savings accounts normally allow up to six withdrawals or transaction limit each month, which includes:
Transferring an overdraft to a checking account.
Transferring payments electronically (EFTs).
ACH (Automated Clearing House) transfers.
Phone, fax, computer, or mobile device transfers.
Phone, fax, computer, or mobile device wire transfers.
Transactions using a check or debit card.
How does a savings account work?
Savings and other deposit accounts are major sources of money that financial firms use for loans. As a result, you will acquire savings accounts at almost every bank or credit union, whether they operate as traditional brick-and-mortar establishments or function online. Savings accounts are also available at several investing and trading organizations. Interest rates on savings accounts vary. Banks and credit unions can adjust their rates anytime, except for promotions offering a fixed rate until a specific date. The more attractive the rate, the more likely it will vary.
Changes in the federal funds rate might cause financial institutions to change their deposit rates. Some financial organizations have high-yield savings accounts, which are worth considering. Some savings accounts need a minimum balance amount to avoid monthly fees or receive the highest reported rate, while others do not. Understand the restrictions of your specific account to prevent diluting your earnings with fees.
Money can be moved into or out of your savings account online, at a bank or ATM, electronically, or by direct deposit. Transfers are generally arranged over the phone as well. After the government sets a withdrawal restriction, some banks limit withdrawals to a particular number each month. If you make more than this number of withdrawals, your bank may charge you a fee, terminate your account, or change it to a checking account. The amount in the account limits the amount of money that can be withdrawn. Savings account interest is taxable income, much like interest collected on a money market, a chain of deposits, or a checking account.
Types of savings bank accounts
In the Philippines, there are five main types of savings accounts: regular, passbook, basic, digital, and joint banking accounts. Each type of savings account has advantages and disadvantages. You must be familiar with each type to select the one that best meets your demands.
Regular savings account
A regular savings account is more prevalent and provides better interest rates and additional features than a basic savings account. It generally necessitates a larger initial investment and ongoing balance maintenance. Many typical savings accounts have convenient ATM access, Internet banking, and direct deposit. These savings accounts often allow you to earn interest on your funds, albeit the rates are usually lower than those offered by other savings products. Many banks and credit unions offer a regular savings account with a modest minimum deposit.
pros
Your funds are safe
Regular savings accounts were originally popular because they were the safest place to save your money — and they still are. The Philippine Deposit Insurance Corporation (PDIC) insures your accounts for up to ₱500,000. If a bank or credit union collapses, the government will step in to replace any cash lost.
Your funds are liquid
If you place your money in a CD or an IRA arrangement, you may have to pay a surcharge if you need to take it immediately. Regular savings accounts are liquid, which means you can withdraw money now or whenever you need it without penalty. Another advantage is that the money in a regular savings account decreases only when you remove it. Compared to most investment accounts, their values fluctuate due to market volatility. When the need occurs, you may not have the amount you thought you had in these accounts.
cons
There is a low yield
Regular savings accounts provide safety and liquidity at a high cost: they provide very little return compared to other accounts. They are among the least profitable methods to save money, with annual interest rates ranging from 1% to 2%. Rates differ province to province and bank to bank, so shop around before committing your money. Whatever interest rate you receive will be significantly lower than the return on other types of accounts.
There are no tax savings
The funds you deposit into a regular savings account have already been taxed. In addition, any interest you earn will be taxed at the full rate. These characteristics do not compare favorably with tax-deferred investment options such as IRAs, Keogh accounts, and other accounts. Given the low-interest rate and absence of a tax benefit, you may wish to set aside normal savings account for your emergency funds. That is where security and liquidity are most important.
Passbook savings accounts
A passbook savings account is a classic form of bank account in which you deposit money and receive a tangible book known as a passbook with a record of all your activities. Your money earns a fixed rate of interest. This sort of account, however, is quite safe and handy because you can check your monitor at any time using your passbook or the bank’s app, but you cannot deposit or withdraw without visiting a branch.
pros
Safer transactions
Passbook savings accounts, according to some, provide safer transactions. Everyone does not trust ATMs; some individuals believe they are confusing and hazardous. These clients want to know who is in charge of their money. Face-to-face interaction with a passbook savings account might put some people at ease.
Easy focus on savings
Withdrawals from a passbook savings account must be performed in person rather than using an ATM card. This helps you save money since you are less likely to make an unnecessary purchase. To withdraw money, you must go to the bank, fill out a slip, and present it to the teller. The sale is recorded in the passbook. This provides you more time to consider the deal than just swiping a card.
Lower barrier to entry
Passbook savings accounts are ideal for people who wish to save money without worrying about minimum balances or monthly fees. These accounts often have no fees or monthly balance restrictions; nevertheless, they provide lower interest rates, which might be negative.
cons
Lower interest rates
Passbook savings accounts' biggest downside is their poor interest rates. A passbook savings account is not a suitable option if you want to earn a high rate of return on your money. The aggregate nationwide interest rate in December 2010 was less than 1%. However, this may not be an issue if you only want liquid finances in emergencies.
No monthly statement
A monthly statement is not sent with a passbook savings account. You must ensure that all deposits, withdrawals, and interest payments are noted in your booklet. This might be a significant disadvantage if you are not well structured.
Business savings accounts
A business savings account is a type of bank account only available to businesses. It has many of the same characteristics as a personal savings account, such as the opportunity to earn interest on deposits and withdraw cash as required. However, there are several important distinctions between the two types of accounts. Business savings accounts, for example, often have higher minimum balance requirements and provide interest rates that differ from personal savings accounts.
pros
it allows you to Save money for large purchases
If your organization can save for a large purchase, such as equipment, buying with cash is quick and uncomplicated, with no extra interest, and provides immediate discounts or rebates in certain situations. When using your funds for large expenditures, keep in mind the influence on the company's working capital. Will your cash savings affect the company's capacity to satisfy other short-term commitments such as payroll or loan payments? A well-balanced savings strategy to replace assets is critical and can help your firm save money in the long run.
it allows you to Grow and expand
You never know when a chance to expand your business may arise or when you will want to prepare for expansion carefully. There are choices for companies other than typical savings or money market accounts, depending on when you need rapid access to your savings. For example, certificates of deposit (CDs) might offer the possibility of earning higher interest on funds that can be held for extended periods. Different maturity dates assist in making funds more liquid while providing higher interest income when CDs are laddered. Investment sweeps are another option for automatically moving money from low-interest accounts to higher-interest accounts. Using the various business savings accounts can provide you with the most flexibility and rewards to capitalize on expansion prospects.
it Makes a financial buffer available
Many firms have a periodic sales cycle, and certain industries, such as agriculture and manufacturing, have substantial seasonal changes — the more frequent and severe the downtimes, the more money your company should save. Even for firms that experience little to no downtime, it is prudent to plan for the unexpected. As financial experts advise individual homes to keep enough emergency funds to cover monthly costs, so should your business.
cons
it has High minimum balance requirement
When you create a business savings bank account, you must keep a minimum average amount in the account. The bank will penalize you if you fail to maintain this amount. So, before creating an account, check the bank's minimum balance requirements and maintain this level to avoid the penalty.
Joint savings accounts
A joint account is a savings account that two or more people share. Couples that wish to save money together should open this sort of account. The disadvantage is that all account holders have equal access to the funds. Therefore, trusting the other persons involved is essential.
pros
Easier budgeting
You'll know exactly how much money you have to spend for the rest of the month if you put both of your funds into a separate account for bills. This will make it easier to stick to your monthly budget. If you have an unexpected cost, you'll know where you stand financially after it's over.
Better financial management
Once you've established your joint savings account and finalized your budget, you can begin to schedule your bill due dates to coincide with payment days. For example, if you have a credit card and get paid on the first and fifteenth of each month, contact your lender and make arrangements to pay them on these days. You won't have to struggle to save money to cover such costs this way. When you get paid, they will be deducted directly from your account.
cons
hidden problems
If you're used to being self-sufficient and spending your money without consulting anybody, a joint savings bank account may be a shocking awakening. Money problems can lead to relationship problems, especially if you don't communicate well with the joint account holder.
Risk of partner withdrawing without consent
If you put all your money into a joint savings account that is an Either to Sign account, you risk losing everything. Your spouse might remove everything without informing you, and you have little legal remedy because you authorized the Either to Sign access.
Time deposits
A time deposit is a type of savings account similar to an investment. A time deposit is identical to a passbook savings account. Still, one significant difference is that you cannot access your funds for a specified time (usually 30, 60, or 90 days). This account often provides a greater interest rate than a passbook savings account. Furthermore, you will likely be penalized if you need to access your funds before the specified withdrawal date.
pros
They are simple
Time deposits, unlike many financial instruments, are straightforward to grasp. They're also straightforward to use: once you've set up a time deposit, you don't have to worry about it until it's ready to expire.
Your interest is fixed
Because interest rates do not fluctuate throughout a time deposit period, your rate of return might well be guaranteed. Fixing looks better if market interest rates decline after your time deposit begins.
They are secured by the government
The Philippine Deposit Insurance Corporation ensures that time deposits are practically risk-free. If you establish a term deposit with a lender and that company fails, the federal government will compensate you for up to ₱500,000 in losses. That is, if you had ₱530,000 in a time deposit, you would get ₱500,000 but lose ₱30,000. You could, however, protect yourself by dividing the ₱530,000 into two term deposits. Both would be under the ₱500,000 limit.
cons
Lower interest rates than you think
Time deposits sometimes have honeymoon rates, but these bonus payments frequently expire after a few months and are not renewed when your time deposit rolls over. For example, a lender may entice you to open a one-year time deposit with an advertisement promising 3% interest. However, the regular interest rate may be 2.50 %; you may only receive the additional 0.50 percentage point for the first three months. So, instead of the 3.00% rate piqued your interest, you'd be paid 2.50% for the final nine months of your term deposit. If you let your time deposit roll over, you'd presumably keep the 2.50 % standard rate.
Substandard returns
You may be able to generate more cash by investing in managed funds, real estate, or stocks (albeit at greater risk). Regular savings accounts may also offer more interest than time deposits.
Digital bank accounts
An online bank account can only be accessed over the internet. This account is ideal for those who wish to save money but don't have the time to visit a bank branch. While digital banks often provide greater interest rates than conventional banks, the drawback is that you will lack liquidity. If you require actual currency, you must transfer funds from your digital bank to a traditional bank, which may result in transfer costs.
pros
Availability 24/7
It is always accessible. You can complete your activities from any location and time, including late at night or on vacation when the bank is closed. The only requirement is an active network connection.
No long queues
You do not have to wait in line to pay your bills. You no longer need to save receipts for all invoices because you can now examine your transactions.
Convenience banking
It's convenient since you can pay bills and move money between accounts from almost anywhere in the world.
cons
Servers might be down
If the bank's server is unavailable due to a lack of internet access or a poor connection, it may be difficult to determine whether your transaction was successful. You cannot access online banking if you do not have an internet connection. Consequently, it may be ineffective if you do not have access to the internet.
Hard to understand
Understanding how to use online banking may be tough at first. However, some websites demonstrate how to access an online bank (not all banks offer this). As a result, a person new to technology may encounter certain difficulties.
How to get a savings account
It should take less than an hour to open a savings account (sometimes just a few minutes). The simplest approach to creating an account is to choose a bank you trust and apply online. If you want to do it in person, visit a nearby bank and inquire about creating an account.
To establish an account, at least one account holder must be at least 18 years old. Specifics differ at each bank, so if you're creating a savings account for a child, it's a good idea to inquire. There are several alternatives, so check with your bank before creating an account for one of your kids. Other factors to consider while looking into savings accounts are:
Banks. Before opening an account, check the interest rate, fees, and necessary balance requirements.
Credit unions. If you're considering joining a credit union, be sure you're qualified. Look for it online or call the credit union to inquire about creating an account.
Information you need. Check that you have all of the information required to establish an account. Government-issued identity (such as a driver's license, military ID, or other ID), personal social security number, and postal address are all examples.
How to open a savings account
The procedure of setting up an account takes less than an hour. Most of the time, it simply takes a couple of minutes, and the client is set for a few years. Customers who do not want to visit a bank but want to open an account can do it online using a computer or a mobile phone. To open an account, follow these simple steps:
Compare banks. Compare banks based on their checking fees, profits, and minimum balance requirements. Savings accounts do not provide much interest, so any fees will be absorbed by the funds deposited.
Check eligibility. The first step for clients who prefer a credit union is determining eligibility. The necessary information is available online or by contacting a credit union customer service representative.
Gather all the needed documents. Before opening an account, a client should acquire all the information the bank wants, such as their social security number, driver's license, or military identity. To open an account, the consumer must be over 18. However, the criteria differ from one bank to the next, so it is important to check with a customer care representative or the National Credit Union Administration.
Open and fund your account. Once you've discovered the correct credit union or bank, set up an account that's simple to maintain or deposit into. Customers that make large deposits benefit from accounts with a greater interest rate. The final step in setting up an account is generally to fund it with money. It can be performed immediately or when the consumer is available. Customers with significant assets can speak with a customer service representative to learn what the bank offers. The bank's manager could be right around the corner, and such a meeting frequently results in a fantastic bargain. Whether the bank of choice seems unknown, it is usually a good idea to look them up and see if the Federal Deposit Insurance Corporation insures them.
How much does a savings account cost?
While most savings accounts are free, there are certain restrictions and potential charges. Accounts often have minimum balances that must be maintained. If you do not keep the minimum amount, banks frequently levy a monthly or yearly fee, or both. Minimum balance fees will be deducted from your account. A savings account might lose money if your balance falls to zero and your bank withdraws the maintenance charge. You may also be charged an overdraft fee.
Credit unions do not charge the same fees as banks. Most, instead, place a hold on a certain cash amount you must deposit when you start your account. For example, if the minimum amount is ₱10,000, you must deposit that amount to create your account, and you will not have access to it for the duration of your account's existence.
Conclusion
Savings accounts are one of the most straightforward methods to generate interest on your money. They provide better interest rates than traditional checking accounts while simplifying spending and withdrawing funds. On the other hand, savings account rates are substantially lower than other investments and do not keep pace with inflation.
