What is a Savings Account?

Everyone has heard the terms ‘savings account’, but what does a savings account do and what facilities does it provide people usually get confused. So, this article will clear the doubts about the savings accounts.

What is Savings Account?

A saving account is a deposit account where a person can save their money instead of home to the bank for a short/long period. Money from the account can be withdrawn primarily using ATM, or checkbook. These accounts are interest-based, interest in this account varies from bank to bank. The purpose of a savings account is to give a safe space to park your money not used for daily expenses.

Anyone can open their savings account or even a joint account with some KYC documents. Some common documents required to open a savings account are address proof, date of birth proof, two passport-size photos, etc. Although, now there are many online options available for opening a savings account where you can upload documents online and click your photos online. Some bank often sends their employee to the customer’s home for opening a bank account.

Lastly, before opening a savings account in any bank/ financial institution do check the performance of the bank such as, how many branches are available in the town/city/village, their interest rates, minimum balance, and their facilities.

Benefits of Saving Account

Now let’s understand this with the help of an example: 

You have 200 rupees in your pocket and you have two options either to keep that money in your pocket or a savings account. After a year the money you kept in your pocket will remain at 200 & the money in the saving account will be more than 200, the exact figure varies from bank to bank, but also remember the interest you get in your savings account are taxable (if the amount saved in the account is eligible as per the tax slabs) you need to pay tax according to your tax slab. 

A saving account provides liquidity of money, instead of carrying cash in your pocket you just take an ATM card or internet banking by which you can withdraw your money at any point in time. You need a savings account for receiving payments, paying bills, mobile recharge, and making other investments. Holding a savings account at the same institution as the other accounts can offer some convenience such as instant money transfer, deposit, or withdrawal, low money transfer fees, etc.

Disadvantages of Savings Account 

In the early 90’s when the banking sector was growing the interest rate provided by the bank in a savings account was nearly 10 to 12% per annum which is now going down to 2 to 4% per annum. So, if you are looking for a saving account from an investment perspective the idea fails there but remember savings account open the door for other investment such as mutual funds, stocks, crypto, etc.

A saving account is a poor option when you want that fund regularly as many banks allow only a few numbers of withdrawals in a month, so it is recommended not to keep that money that you will require daily. Many banks set a minimum balance limit that has to be maintained in your bank account throughout the month. So, it is advisable to check these limits before opening a savings account in a bank.

Comparison with Current Account

We have seen about the savings account then the question arises, why the current account facilities are provided by the bank, what makes this account current from a savings account? A current account is designed for businesses that have a high number of transactions to be performed on daily basis.

Every individual who does business and does a lot of transactions must have a current account, but the opening of a current account is not easy as a savings account apart from the document required in savings account some additional documents such as GST number, Professional Tax receipt, etc. are required.

Additionally, do not open a current account for investment purposes as it does not provide any interest on your deposit and even the minimum balance for the current account is too high for the savings account.

Important

In this article there is the term ‘Minimum Balance‘ this term looks simple but there is something twist that must be known. Let’s explore that. Minimum Balance means the amount of money that is to be kept in your bank account throughout, but does it mean that one should keep that minimum balance every day??

To maintain a minimum balance, one should know about the ‘Monthly Average Balance (MAB)’.

The formula for MAB = (money in account each day/ Total number of days in a month) 

Consider a situation, Minimum Balance to be maintained is 1000, in a month of 30 days, on the day 1st day the amount in the account is 30000 and from the next day onwards amount in the account is 0. then MAB = (30000+0+0........+0)/30 = 1000.

That means, in a particular account if MAB>=Minimum Balance then the cap of minimum balance is maintained.