The Hidden Cost of Savings Accounts
by Christina Couch
They offer security for your funds as well as greater liquidity, but traditional savings accounts come with significant costs, too. In exchange for the freedom to pull funds out on a whim, savings accounts can burden consumers with low return rates, hidden fees and surprise penalties.
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Here are four reasons to consider stashing your cash someplace other than a savings account.
The major loss that savings account holders face is simply not getting higher returns on their money. With the largest banks currently offering around a half-percent in interest, consumers will gain greater returns in almost any other savings instrument.
"With the current interest rate environment, it's basically the same thing as storing your money under a mattress," says Hollis Colquhoun, co-author of "Women Empowering Themselves: A Financial Survival Guide."
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"If your money is just going to sit there, consider placing it in a variety of mutual funds and securities. If you need the liquidity, look at online banks with higher interest rates," she says.
While some banking institutions have rates well below 1 percent, many online institutions offer savings accounts with more than double the interest rate. Colquhoun says that account holders also need to be aware of how their interest is compounded. Most banks compound interest daily and pay out monthly. However, a few compound much later monthly or even quarterly -- significantly reducing your returns.
The savings account with the highest interest rate may not pay off the most in the end. For example, an institution may offer a high introductory rate of 2.25 percent on their online money market accounts. However, after the first three months, the rate drops to 0.75 percent. Before signing onto a savings account, consumers should do their homework, says June Walbert, a Certified Financial Planner with USAA Financial Planning Services in San Antonio.
"You need to ask about what the bank will pay on your account and how long that rate is good for," Walbert says. "Ask them to run some numbers for you. If they can't give you a mathematical example about how much interest you will accrue over a certain period of time, move to another bank."
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To combat low return rates, Walbert advises consumers to check out banks that offer a cash bonus for opening a savings account. With current interest rates so low, a modest $50 bonus is the equivalent of 10 years' worth of returns on a $1,000 savings account with a 0.5 percent interest rate.
Annual and Minimum Balance Fees
Some banks charge simply for the privilege of opening a savings account. For savers with low balances, a $25 annual fee and a monthly minimum-balance charge ranging from $4 to $10 can suck up your savings at an alarming rate. For consumers with low savings of $500 or less, an annual fee combined with repeated minimum balance charges can cut their savings in half in less than one year.
"Consumers need to be clear about the rules and penalties of their accounts, but it also can't hurt to ask if a bank will waive a fee," says Walbert. "Ask for things like a rate match on a savings account or a pass on a minimum-balance fee. The worst they can do is say no."
Savings accounts are designed to provide liquidity with a few restrictions. According to the Federal Reserve, consumers can legally make six withdrawals or transfers from a savings account or money market account per month.
However, it's up to the banks to set their own rules, and many only allow two to four withdrawals without penalty. Exceed that number and you'll be hit with a withdrawal fee of $3 to $10 for each time you go over. Consumers with low account balances could also be in danger of dropping below the minimum balance and incurring extra fees.
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"There are so many bells, whistles, freckles and colors of bank accounts these days, it's important for the consumer to read the fine print and know what (he or she is) getting into," says Colquhoun. "Ask questions, read the fine print and choose a (savings) account that works for you."