Saving Accounts 101 - All you need to know to start!

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When you think of banks, the first and foremost services that is synonymous with banks is a savings account. Having a savings account today is officially the safest place to save your money. If you’re one of those who still hide money under your mattress, then surely you’ve been living under a rock.

Having a good savings account balance also plays a vital role in helping you make money. Here’s how.

What is a savings account?

A savings account is a version of a bank account that allows you to store your money securely. By depositing money in a savings account, you may earn a small profit over time based on the interest rate the bank offers. Savings accounts are a convenient way to store your money in a bank, given that they protect your money against inflation and offer a higher degree of liquidity than most investments.

The problem with cash and purchasing power

But why is it that we must lean on the banking system in order to save our money? Why not just keep some cash aside each month?

Technically, you could save a portion of your cash every month. Over time, this should build up into a substantial pool of wealth that you could draw upon in times of need. The cash-saving strategy has one glaring problem, though - a loss in purchasing power.

Let me explain- if you were to save Rs 10,000 cash each year over a period of ten years, you should have saved around Rs 1,00,000. This is a step in the right direction, but having Rs 1,00,000 today vs having it five years from now are two entirely different things. This is because the cost of goods and services tends to increase over time. 

For example: If a box of a dozen mangoes is Rs 1000 in 2022, you could buy 100 boxes with Rs 1,00,000. However, let's say in the year 2032, a box of a dozen mangoes costs Rs 1250. Now the same Rs 1,00,000 would allow you to buy only 80 boxes. Inflation has caused the price of mangoes to go up, and as a result, your money’s purchasing power has decreased.

Investing, Interest rates and Inflation - How to make money through savings accounts

Well, then how do we combat this problem of decreasing purchase power over time? There are several ways to save your money smartly or invest them in combating the problem of inflation. 

You could invest money in the financial markets and grow your money at a rate higher than the rate of inflation. This would mean that not only have you beat the rising prices, but you’ve also made more money than before. The problem is that financial markets can be quite volatile, and while you make more money, there’s also a chance that you could lose a lot of money if you’re inexperienced or if the market is in a low phase.

This is where savings accounts come in. They are generally a lot more stable long term than financial markets. While you might not be able to make as much money through them as a stock market investment, they are a great hedge for inflation. The money stored in a savings account is also more easily accessible than a market investment. 

The one golden rule to keep in mind is that as long as the bank's interest rate on their savings account is higher than the current inflation rate, your money’s purchasing power will increase over time.

How a savings account helps protect your purchasing power over time

Principal invested

Rate of inflation

Interest rate of saving account

Net growth rate

Net interest earned

Money saved at the end of 10 years

₹10,000

2%

6%

4%

₹4,908.33

₹14,908.33*

Benefits of savings accounts

Now that we’ve established the need and importance of savings accounts when it comes to storing our money, let's discuss some of the advantages of having a savings account.

1. Earning interest

The most apparent advantage of a savings account is the fact that you earn interest over time. This means that you make money passively. Utilising a savings account is one of the best ways to start earning income passively, that is, without working to earn money actively.

2. Hedge against inflation

Having a savings account was once considered a good hedge against inflation. While that purpose is not very fruitful these days, other methods like investing in the stock market, mutual funds, and side hustle to earn extra are various other ways to beat inflation. This means that, unlike cash savings, your money’s purchasing power is preserved over time.

3. High liquidity

The money saved in a savings account has much higher liquidity than your average investment. This is because the money saved isn't locked in for a certain period, unlike financial instruments like fixed deposits. While certain mutual funds also come with no lock-in and zero exit load process, a savings account is one such instrument where your funds are in your hands and are immediately available.

4. Low Risk

Savings accounts have a much lower risk profile than most market investments. This is because they are barely affected by changes in the financial or money markets. Nationalised banks are also backed by the government, reducing the risk of default even further.

Note: While the risk associated with savings accounts is relatively low, they aren't considered entirely risk-free. Cases of default are extremely low, but it is still a possibility.

Drawbacks of savings accounts

While savings accounts have a plethora of advantages over traditional savings methods, and they are safer than most investments, they aren’t perfect.

1. Minimum deposits

Most savings accounts require you to maintain a minimum bank balance at the end of the month. Failing to maintain this minimum savings account balance leads to penalties incurred. The minimum balance required differs between banks and savings account types. 

Not all accounts require you to maintain a minimum balance, however. 

Fi offers a digital zero balance savings account that takes only a few minutes to sign up for and has no minimum balance requirements.

2. Interest rates may change over time

Unlike financial instruments like fixed deposits or recurring deposits, the interest rates the bank offers for savings accounts can be revised over time. If the interest rates are reduced, it can be harder to follow your financial plan for the year.

3. Slower growth than other financial instruments

While your money will grow in a savings account, it does not grow as fast as other investments. There is a greater chance of growing your money faster through investing in mutual funds or buying individual stocks in the financial markets. Greater growth potential does come with an increased risk of loss, however.

4. Bank fees

Banks typically charge a fee for managing your savings account. It is a good habit to be aware of all the potential charges you could incur for services involving your bank account. 

Some of the most common fees involving your savings accounts are as follows.

a. Maintenance fees

Banks charge a fee for the maintenance of your savings account. This fee is levied either on a monthly basis or an annual basis.

b. ATM fees

Banks usually let their customers use their ATMs free of charge. However, when you wish to withdraw money from an ATM not associated with your bank, they charge a withdrawal fee. If you are withdrawing from an ATM in a foreign country, they charge an additional currency conversion fee in addition to the withdrawal fee.

c. Wire transfer fees

When sending money to a different party through a wire transfer, you will incur a fee for said transfer. In some cases, you may also incur a small fee as the recipient of a transfer.

d. Debit/ Credit card transaction fees 

Banks usually charge a small fee for transactions made through their debit/ credit card. Interestingly though, in recent years, some banks have begun to use reward and payback systems for customers that use their cards frequently. This could balance out or supersede the fee they charge in some cases.

e. Foreign transaction fees

For payments made outside the country, whether it is from your country to a different country through wire transfer or if it is a card payment made while travelling to a different country, you will typically be charged around 3% interest on the total amount paid.

f. Card issuance

If you have lost or misplaced your current debit/ credit card, or if you just need to issue a new or a secondary card, your bank will charge you a fee for issuing a new card.

Types of savings account

Now that we have a good understanding of what to expect from a savings account, let’s understand the nuances between the different types of savings accounts.

1. Typical savings accounts

These are regular savings accounts. They act as a safe house for your funds in the banking system. They are helpful for hedging your money against inflation while making a small profit over time based on the interest rates they offer.

2. Zero balance savings accounts

Zero balance savings accounts are those savings accounts that do not require users to maintain a minimum balance. These account types are very useful for users that are new to the banking system. As they do not require a minimum balance, you do not run the risk of incurring penalties for having no funds in this account. However, do not confuse this for being a free savings account. You will still need to pay for the other fees incurred by the bank, like their maintenance fee.

3. High Yield savings accounts

These savings accounts are called high yield savings accounts as they offer a much higher interest rate than a regular savings account. As a result, you can earn more interest over time. Neo banks and digital-only financial institutions offer high-yield savings accounts in most circumstances. This is a direct result of not having to maintain physical locations. Since neo banks save on this cost, they can offer their customers higher interest rates and potential rewards. 

4. Company savings accounts

Companies open these savings accounts for their staff to make the distribution of salaries easier. These accounts automatically turn to regular savings accounts if salaries aren't credited for a period of 3 months.

5. Minor’s savings accounts

Minor’s savings accounts are set up to be able to invest for your children over the long term. A parent or legal guardian must handle these accounts until the minor reaches age 10. Post the age of 10, the minor can operate this account by themselves. Once they reach the age of 18, this account automatically turns into a regular savings account.

6. Senior citizen savings accounts

These accounts are meant for senior citizens only. They function similarly to a regular savings account but have some special privileges and slightly higher interest rates.

7. Joint accounts

A joint savings account has the features of a regular savings account, but with two or more people that have access to said account. This means all the individuals with access to the account can withdraw or deposit funds from the account.

8. 3-in-1 account

These types of accounts are generally preferred by individuals looking to invest in the financial markets. They combine a savings account, a trading account, and a demat account to make the investment process simpler.

Savings vs Current accounts

A savings account might be the most common type of bank account there is. However, this isn’t the only type of bank account that exists. There is a special kind of account called current account for those running a business. Current accounts are a type of bank account that is usually preferred for business-related transactions. The two have a few key differences that we must understand.

Savings account

Current account

Savings accounts are primarily used to save money for the medium to long term

Current accounts are primarily used to make quick transactions using the banking system

You earn interest over time based on your bank's offered rate of interest

You earn no interest on your money in a current account.

After a certain number of transactions, the bank may charge an additional fee

No additional fees are charged for transactions. 

They usually have limits on the number of transactions, withdrawals, and so on

They usually have no limit on the number of transactions, no withdrawal or deposit limits, and additional features like overdrafts and others.

Primarily used by individuals 

Primarily used by businesses 

Relatively low minimum balance required

Relatively high minimum balance required

Savings accounts vs fixed deposits

Like current accounts, a lot of people tend to confuse fixed deposit accounts with savings accounts. While they have certain similarities, they exist for two different purposes.

Savings account

Fixed Deposits

Savings accounts are used to grow money slowly while giving users access to banking features.

Fixed deposit accounts are used to invest money for the long term.

They have higher liquidity than fixed deposit accounts as they have no exit fees. They may incur small withdrawal fees in some cases.

Fixed deposits are not nearly as liquid as savings accounts. They generally incur heavy exit fees if an individual wants to withdraw the money from the account before the maturity period.

They generally offer comparatively lower rates of interest

They generally offer higher rates of interest than savings account

One important similarity between savings accounts and fixed deposit accounts is that while they have slower growth than their financial market counterparts, they are virtually unaffected by fluctuations in market prices. It is generally a good habit for investors to save some portion of their income in less risky investments. 

How to open a savings account

Opening a savings account is a fairly straightforward process. You must pass the eligibility criteria for opening a savings account in India for starters. The criteria for opening a savings account differ from bank to bank.

The common criteria are as follows - 

  1. The individuals that wish to open a savings account must be over the age of 18.
  2. They must be residents of India.
  3. They must have all the necessary documentation required to open a savings account.

In some instances, foreign nationals may also open a savings account in India. Minors may also be able to open a savings account with their parent(s)/ legal guardian.

To open a savings account, you must submit a document for identity proof and address proof. Some of the common documents for proof are as follows -

1. Identity proof 

  • Aadhar card
  • Passport
  • Pan card
  • Voter ID
  • Driver’s license

2. Address proof 

  • Aadhar card
  • Passport
  • Voter ID
  • Utility bills

In addition to identity and address proof, banks may ask for physical or digital copies of your passport photographs. 

You can either submit these documents physically or, in the case of a neobank, apply for savings account online. For neobanks, you can just upload the documents required from the comfort of your home. Once the bank verifies your identity, you can open a savings account.

How can you open a savings bank account online with Fi?

At Fi, we have a simple, swift, and hassle-free process for opening a digital savings bank account. Here are the steps you must follow for an online savings account opening with Fi. 

Download our mobile app:

 All you have to do is visit our official website or download our mobile app and get started with your online savings account.

Make sure you’re in a bright area:

This is necessary because you’ll need to click a selfie and submit your picture to continue the account opening process. And surely, a brightly lit room is the right place for completing this part of the account opening process. 

Keep your KYC documents ready:

Opening a Fi Digital Savings Account is an entirely paperless process. However, we do need some KYC documents from you. You must, therefore, keep a digital copy of your PAN card as well as your Aadhaar card ready before beginning your online account opening application. Furthermore, you must also keep the original documents handy for verification. 

Fill out the form, and get your savings account:

The entire process will be complete before you know it. If you are a working professional, you can share your employment details and open a Zero Balance Digital Savings Account with us. 

The quicker you do your part, the quicker we do ours:

We place a high value on your time at Fi. Ideally, it would not take you more than five minutes to fill out and submit the application form online. Once we have verified all the necessary documents, your digital savings account with Fi shall be activated and ready for you to operate.

Conclusion

A savings account is the most well-known financial instrument in the world- and for a good reason. It is versatile, allowing you to keep your money safe, earn interest on it, and access several useful banking features. You also need a bank account if you wish to start investing eventually. In any case, if you don’t have a savings account yet and rely on cash - your money doesn't make money. Open a savings account today and enjoy your earned interest. 

Frequently Asked Questions

1. What are the types of savings accounts?

There are several different kinds of saving accounts in the world. Four of the most common types of savings accounts are - 

Regular savings accounts -

These accounts store your funds safely in banks. They offer interest rates based on which your money grows over time. 

Zero balance savings accounts -

These accounts do not require customers to maintain a minimum amount of funds in their accounts. Outside of this nuance, they function similarly to regular savings accounts.

High Yield savings accounts -

High yield savings accounts offer average rates of interest for their customers. These bank accounts are commonly seen in neo banks.

Salary accounts -

These savings accounts are used by companies to distribute salaries to their employees. They may be subject to preferential rules at the discretion of the bank.

2. What is the main point of having a savings account?

Different people might have different reasons to have a savings account. The most common reason is to save your money from losing its purchasing power over time and to have a safe space to store your money.

3. Can you write checks from a savings account?

Yes, in India, you can generally write checks from a savings account. 

4. Can you lose money in a savings account?

While it isn't impossible to lose money in a savings account, it is highly unlikely. What you need to keep in mind is that as long as the rate of interest offered by the bank is higher than the rate of inflation, you will not lose money in your savings account.

5. What is an example of a savings account?

A traditional savings account is the most common form of a savings account. It is a financial instrument offered by banks and other financial institutions for individuals to save and grow their money.

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