Mark Hauser, Co-Managing Partner at Hauser Private Equity, discusses the benefits of savings accounts for investment planning purposes.
A well-rounded investment plan typically includes a mix of investment types. Stocks, mutual funds, bonds, and annuities are common investment vehicles, among others. Investors often diversify their holdings, including several types in their portfolios. By varying investments, investors can minimize their risks and maximize their potential for returns.
Savings Accounts are a Longtime Investment Mainstay
Historically, savings accounts have been part of many Americans’ investment plans. For decades, budget-conscious households consistently put money away for important purchases and/or emergencies. Many community banks also promoted special-purpose savings accounts.
In the past, savings accounts generally carried a respectable interest rate. Today, however, personal savings accounts pay decidedly anemic rates under any standard of measurement. Traditional banks generally pay the lowest rates compared to lower-overhead online banks.
Despite these abysmal rates, however, private equity expert Mark Hauser explains that savings accounts may still have a role in 21st-century investment plans. The investor’s goals will help to determine the suitability of each investment type.
Savings Accounts Pros and Cons
Savings accounts come with several clear advantages and disadvantages. Through an objective analysis, investors can decide if a savings account makes sense for their financial goals.
5 Savings Account Advantages
Personal savings accounts represent an easy way to save money without worrying about market ups and downs. Here are five advantages of these low-tech savings vehicles.
Instant Branch-based Funds Access
Getting funds from a savings account is much simpler than withdrawing funds from other investment accounts. Depositors can access their funds from any branch during business hours, and there is no waiting period. In contrast, says Mark Hauser, investors who sell a stock must wait two business days before accessing their cash from a designated account.
Branch Access Requirement Encourages Savings
Personal checking accounts typically feature easy funds access via a linked debit card. Most savings accounts don’t include debit cards, so the customer must visit the branch to withdraw funds in cash. This extra step may cause customers to think twice about depleting their savings accounts.
However, online banking customers can transfer funds from their savings to a checking account, which offers easier withdrawals. This provides a workaround to the branch access requirement.
Optimal Direct Deposit Destination
Regular paycheck direct deposits are simple with a dedicated savings account. Alternatively, customers can split a direct deposit between their checking and savings accounts. Either way, this streamlined approach saves time and money compared to in-person branch deposits.
Good for Goal-Directed Savings
A personal savings account is ideal for goal-directed savings. Examples include socking away cash for an emergency fund, new appliances, or an upcoming vacation. Although customers won’t accrue much interest, their deposits are insured up to $250,000 per account. Finally, customers can open multiple targeted savings accounts based on their savings goals.
Ironclad FDIC Insurance
Most importantly, each personal savings account is insured by the Federal Deposit Insurance Corporation (or FDIC) up to $250,000. Private equity expert Mark Hauser emphasizes that FDIC insurance protects most deposits in the event of a bank failure.
2 Savings Account Disadvantages
Despite savings accounts’ positive attributes, they are often not the best vehicle for reaching a specific financial goal. Here are two reasons why other types of investments may be a better choice.
Unsuitable for Income-focused Investment Goals
Historically, well-heeled investors have strategically positioned their funds so they could live off the interest income. However, even the highest savings account rates would not allow an account holder to do that today. Investors who desire a livable income should direct most of their funds into other investment vehicles.
Undesirable for Growth-focused Investment Goals
For investors seeking high returns, a savings account can’t meet that requirement under the best circumstances. For perspective, a 2% to 3% savings account yield would be considered on the higher end of the spectrum in 2022.
However, Mark Hauser explains that the S&P 500 index’s average return is in the 10% range. Individual stocks can potentially yield 100% (or even higher), although these returns are certainly not guaranteed. Looking at the bigger picture, Mark Hauser says equities may collectively be a better vehicle for achieving longer-term investment goals.
5 Types of Savings Accounts
Maybe investors want to incorporate a savings account (or two) into their portfolios. Before moving forward, they should understand that the marketplace offers multiple savings accounts, each geared to a specific purpose. Each savings account has distinct advantages and disadvantages.
Traditional Savings Account
Conventional banks and credit unions offer traditional savings accounts. These savings vehicles are useful for consumers who want (or need) to save money and aren’t especially concerned about the interest rate.
Current interest rates produce very little yield, although online banks’ rates are often slightly higher than conventional banks’ rates. However, excess withdrawals may incur extra fees. In addition, monthly account maintenance fees may surpass interest earnings.
Traditional savings accounts usually require only a minimal deposit. Accountholders can make deposits and withdrawals at any bank branch. Most banks and credit unions also offer banking services via phone, online portal, or mobile device.
The Federal Deposit Insurance Corporation insures most banks’ savings deposits up to $250,000 per depositor in each account ownership class. The National Credit Union Administration offers similar deposit insurance for federally chartered (plus many state-chartered) credit unions.
High-yield Savings Account
Online banks and online credit unions frequently offer high-yield savings accounts. These newer savings vehicles cater to those who want higher interest rates. In addition, these accountholders are comfortable managing their money via computer or mobile device.
Online banks usually allow customers to open a high-yield savings account with a lower initial deposit. In addition, these accounts generally incur fewer (or no) extra fees compared to conventional bank savings accounts. Finally, Mark Hauser emphasizes that high-yield savings accounts carry FDIC or NCUA insurance, as do traditional savings accounts.
On the downside, online banks have no brick-and-mortar branches, preventing customers from making cash withdrawals. Some conventional banks integrate online banks into their ATM networks, although other financial institutions do not. Finally, transferring funds between an online high-yield savings account and another bank’s account can take several days to process.
Money Market Account
A money market account combines certain savings and checking account features. Conventional banks, online banks, and credit unions offer money market accounts.
Money market accounts pay interest on savings, and rates are usually better than traditional savings accounts. Accountholders may also have check-writing privileges and/or can access their funds via a debit card or ATM withdrawal.
However, money market accounts often require a larger minimum deposit to open an account. Accountholders may need to maintain a higher balance to receive better rates. Money market accounts also frequently incur monthly fees.
Certificate of Deposit
A Certificate of Deposit (or CD) is called a “Time Deposit,” as accountholders commit to leaving their funds in the account for a predetermined period. The account holder earns interest until the CD matures when they can withdraw the funds or roll them into a brand-new CD.
Traditional banks and online banks offer Certificates of Deposit. However, online banks generally offer higher interest rates and lower deposit minimums.
A CD generally doesn’t incur monthly maintenance fees. However, a bank can charge an early withdrawal penalty if an account holder accesses the funds before the CD’s maturity date. Structuring a CD portfolio with several maturity dates will help to resolve this issue.
However, committing to a longer-term CD means an accountholder can’t take advantage of higher upcoming interest rates. For this reason, private equity investor Mark Hauser recommends that investors carefully examine their financial goals before investing in extended-term CDs.
Cash Management Account
A cash management account (or CMA) is designed for those who want readily available cash to apply to a retirement or brokerage account investment. Online brokerages, along with robo-advisor websites, frequently offer cash management accounts to investors.
Cash management accounts earn interest, often delivering rates higher than those at a conventional bank. Investors may also be able to write checks, transfer funds to other internal accounts, and pay bills from their CMA accounts.
A CMA account does have two notable downsides. First, FDIC insurance doesn’t always cover CMA accounts. In addition, the accounts’ online origin generally means account holders cannot access branch banking services.
Choosing the Right Savings Account
With multiple savings account options available, Mark Hauser recommends that investors carefully analyze potential accounts before selecting a specific offering. First, they should pinpoint the account’s goal. Next, they should identify the exact interest rate and note if there are minimum deposit and/or balance requirements. With low-rate interest, bank fees are also a consideration.
The investor should note the ease of funds withdrawal and whether they will incur penalties from this action. Finally, the investor should determine whether the savings account offers any tax advantages or related benefits.
Equipped with answers to these questions, the investor can decide if savings accounts are a viable component of their investment plan. If necessary, a qualified financial advisor can provide valuable recommendations that will help the investor to make an informed decision.