With the stock market up 13% year-to-date, house prices soaring, and your friend suggesting you invest in Bitcoin, you might wonder if a savings account is still a viable option. We’ll explore the advantages and disadvantages of opening an online savings account to help you make an informed decision.

Advantages of Savings Accounts

1. Minimized risk

Investing always carries the risk of losing some or all of your money, but a savings account offers minimal risk and comes with built-in protection. The main risks are if the bank fails or if you mishandle your account details. Fortunately, all savings accounts in the United States are federally insured up to $250,000, so even if your bank collapses, your money is safe. Additionally, most banks implement multi-factor authentication to enhance security, helping protect you from unauthorized access even if you’re not always diligent with your password management.

2. Checking account features

Many online banks now provide hybrid checking-savings accounts or money market accounts with checking features. These hybrid accounts combine the benefits of a savings account with the convenience of checking features, such as the ability to write checks, use a debit card, and make deposits and withdrawals. This setup allows you to save money while still having easy access to your funds when needed.

3. Competitive Interest Rates

While savings account interest rates won’t reach double digits, you don’t have to settle for rates below 1%. The average national rate is around 0.10%, but online banks can offer rates as high as 2.25% APY. This rate can outpace inflation, which is expected to be about 2% in 2020. If you keep your money in a savings account for an extended period, you’ll also benefit from compound interest, which earns interest on your interest.

4. Easy access

A savings account is a valuable resource for emergency situations. Many people use it as an emergency fund. Setting up a small recurring deposit, such as $10 per month, is affordable and effective. Over time, with $120 in annual deposits plus the interest earned, you’ll build a useful reserve. While you hope not to rely on this fund, having it readily available ensures that your money isn’t all tied up in assets or investments, providing you with financial flexibility when needed.

5. Credit card application

A lesser-known advantage of having a savings account, especially for students or those with limited credit history, is that it can aid in applying for your first credit card. When you apply for a credit card, the issuer will check your credit history to assess your ability to repay. If you lack a credit history, they may inquire about your bank accounts. While having a checking account is typically required, having a savings account can further strengthen your application and demonstrate financial responsibility.

Disadvantages of Savings Accounts

1. Fees and Charges

Some online savings accounts do come with fees, ranging from $1 to $50 per month. However, most online banks offer ways to have these fees waived. Typically, you can avoid the fee by maintaining a minimum balance, though some banks may have different criteria or formulas for fee waivers.

2. Lower yields

As noted earlier, various investments can offer much higher returns than a savings account. If you’re comfortable with risk, have a knowledgeable advisor, and possess strong investment insights, you might achieve returns that are double, triple, or even 20 times higher than those from a savings account.

3. Minimum balance requirements

Higher savings rates are typically available to depositors who meet certain minimum requirements, such as an initial deposit or a minimum balance. These minimum balances can vary, ranging from just a few dollars to as much as $10,000. Even the highest requirement of $10,000 is relatively inexpensive compared to the costs of stock market investments or purchasing property. In the context of investment options, the cost is quite reasonable.

4. Better rates from CDs

A certificate of deposit (CD) is another type of savings account offered by banks where the depositor commits to keeping their funds locked in for a set period, which can range from 3 months to several years. Generally, the longer you agree to lock in your money, the higher the interest rate you’ll receive. As of now, online banks are offering 5-year CDs with rates as high as 3.10% APY, which surpasses the highest savings account rate of 2.25%.