Paul has been in higher education for 17 years. He has a master's degree and is earning his PhD in Community College Leadership.
What Is a Savings Account?
You can use a savings account as an account to save your money and earn interest on it at the same time. Savings accounts are the least profitable type of short-term investments. Though they are simple, liquid, and easily accessible, they offer low yields. Most savings accounts do not even keep up with inflation, so you might not want to use them to store money over long periods of time.
The state of the economy and the federal funds rate are the two biggest factors that affect savings account interest rates. Savings account interest rates have been dropping since the late 1980s. Here's a chart showing some examples of how these rates have changed over the past decades:
History of the Savings Account
The savings account started in Europe during the 1500s. Holland was a financial hub for shipping and trading at the time. People had lots of cash and needed a safe and secure place to store it. Cashiers starting providing a means to securely store money for people for a small fee. Back then, savings accounts did not pay interest like they do today.
The idea eventually spread throughout Europe, then to America through English colonies. The idea of a financial institution developed in Europe as early as the 18th century. Along with the idea of cashiers, these new financial institutions also provided loans and financial advice to the population, regardless of social class.
Types of Savings Accounts
There are three common types of savings accounts, which are traditional savings accounts, certificates of deposit, and money market funds.
A traditional savings account is an account held at a bank or credit union. People are allowed to deposit funds into the account and earn a small amount of interest. The funds can be withdrawn quickly and easily when needed by the customer.
Certificates of deposit (CD) are a very common type of short-term investment that is available to anyone. After making a deposit into a CD, the person agrees not to withdraw it for a specific period of time, in return for a higher yield. CD lengths range from three months to as long as five years. CDs are federally insured, so they are one of the safest types of short-term investments.
Money market funds are typically liquid savings accounts that offer a better yield. Money market funds are not federally insured, unlike the traditional savings account. This makes money market funds a higher-risk vehicle for short-term savings.
Why People Invest in Short-Term Assets
People decide to use a savings account for a lot of reasons. Let's discuss a few of them.
Older people who are living off their retirement savings do not want a lot of investment risk. Therefore, they invest in a low-risk savings account. People who are planning to make a purchase soon, such as a car or house, also want a low-risk investment, so they put their money in a savings account. Some people cannot take the pressure of high-risk investments, so they only invest in a low-risk savings account. Another reason is people may be waiting on the market. If, for example, the stock market (long-term investments) is on a downward trend, people may not want to invest in it. Therefore, they will put their money in a savings account while they wait for the market to bottom out.
Existing since the 1500's in Europe, savings accounts are used to save money while at the same time earning interest. The state of the economy and the federal funds rate both affect how much interest is earned.
The three most common types of savings accounts are the traditional savings account, certificate of deposit, and money market funds. A traditional savings account is held at a bank or credit union and allows for funds to be withdrawn quickly as needed. A certificate of deposit is a common short-term investment with a higher yield but with the agreement that the customer doesn't withdraw money for a specific time period. Finally, money market funds are usually liquid savings accounts with a better yield but higher risk. People invest in savings accounts to protect their money, if they don't have the nerves for high-risk investing, or if they are waiting on the stock market to rebound.
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