What's the use of putting money in a savings account if you can lose some of that money just by trying to get it back?
Knowing how to avoid fees on transfers and withdrawals can help you protect your savings by not having to pay just to access your money.
Limits on How You Withdraw Money From a Savings Account
In theory, money in a savings account is supposed to be available whenever you need it, but the reality is not that simple. There are some strings attached to how you can access money in a savings account.
One major difference between savings accounts and checking accounts is the transaction limit. Your savings account comes under federal Regulation D of the Federal Reserve Board, which limits you to no more than six automated payments or transfers to a third party per month. While this limit does not apply to your ability to take money out if it's paid directly to you, it does mean you cannot use savings accounts to make routine payments the way you would with a checking account.
To enforce the limit of six transfers out of a savings account in a statement period, banks customarily charge you a fee for transactions that exceed this limit. Some banks may charge additional fees for transfers, even if you are within the monthly limit of six.
Savings Withdrawal Fees Can Exceed Interest Earned
Knowing how to avoid savings withdrawal fees is important because these fees could easily wipe out the interest your account earns.
A look at the three largest U.S. financial institutions in terms of deposits shows just how widely excess withdrawal fees can vary and how much damage they can do:
|Bank||Excess Withdrawal Fee|
Bank of America
To demonstrate the impact of these fees on the interest your savings account earns, take Bank of America as an example since it's in the middle of the fee range shown above.
A standard savings account at Bank of America earns 0.03% in annual interest. On a $10,000 balance, you would earn $3 a year. A single excess withdrawal fee would more than wipe out that interest - in fact, it would wipe out more than three years' worth of interest.
Clearly, excess withdrawal fees should be avoided completely.
The Role of Savings in Your Finances
Financial products are tools you use to manage your finances and achieve financial goals. It's important to understand that each of them is designed for a specific purpose.
For example, savings accounts - unlike checking accounts - are not for making routine payments. The following are some examples of the proper role for savings accounts:
Accumulating long-term savingsWhile savings accounts limit the number of transfers out you can make, you can put additional money in any time you want. That and the fact that they generally pay higher interest rates than checking accounts make savings accounts a good place to steadily build your savings.
Saving for a specific future expenseBesides saving money for the long term, you may have a specific future purchase in mind. A savings account is a good place to save up for that purchase because you can accumulate savings and interest but then access your money when needed.
- Emergency fund
Though it's good to plan ahead, you can't always predict when you're going to need money. Unexpected events such as having your car break down or losing your job can create sudden needs for cash. Since these tend to be infrequent events rather than regular expenses, a savings account is a good place to keep a reserve of money you can draw upon in case of emergency.
How to Avoid Savings Withdrawal Fees
Using your savings account the right way is one way to avoid savings withdrawal fees. Here are some other tips for avoiding, or at least minimizing, these fees:
Choose a bank with reasonable savings withdrawal fees
The examples shown earlier for the three largest U.S. deposit institutions show that withdrawal fees can vary greatly.
While your goal should be to avoid these fees altogether by not exceeding the limit of six transfers per month, you should choose a bank that has relatively low excess withdrawal fees if you think you may occasionally have to go over that limit.
Know your bank's savings withdrawal rules
Excess withdrawal fees are one of those things that are usually buried in the fine print of your account agreement with the bank. However, it pays to know the rules so you can you stay within them.
This is especially important because some banks may have tighter withdrawal limits than the regulatory cap of six per month. Also, some banks may charge a fee if you try to close the account altogether, especially if you do so within a short time of opening it.
Budget your monthly needs and plan your withdrawals
Planning ahead can help you avoid dipping into your savings account too often. Budget for the month ahead so you can total up how much money you will need to draw from your savings account. That allows you to take out money for your monthly needs all at once rather than as a series of regular transfers.
Note that this kind of budgeting should not only help you avoid excess withdrawal fees, but it should also help you build savings over time. Planning ahead allows you to avoid steadily whittling away your savings with a lot of spur-of-the-moment spending.
Coordinate your savings and checking accounts
Both savings and checking accounts have specific roles to play. A key is finding the right balance between how much of your money should be in a savings account and how much should be in a checking account.
This is another reason budgeting is so important. Generally speaking, it is better to keep as much money as possible in savings rather than checking because savings accounts usually pay more interest. However, you should have at least enough money in your checking account to meet your needs for the month ahead so you don't have to make repeated transfers from your savings account.
Consider a CD ladder for planned liquidity
If you have a series of future financial needs coming up, a CD ladder may be another option for making sure you have money ready to meet those needs. Investing in a series of CDs with maturity dates matched to your upcoming needs can make money available when you need it while boosting the interest you earn in the meantime.
Does Your Bank Charge Too Many Fees?
Excess withdrawal fees are just one example of ways banks can charge you for a savings account. If you haven't done so recently, take a look at your savings account fee schedule to see all the ways you might have to pay for your account.
When choosing a savings account, people often focus solely on the interest rate the bank pays. While that is important, knowing how much the bank charges and for which activities should also be part of your decision. Look for banks that charge lower fees, and try to match the way you are likely to use the account with the bank that has the lowest fees for your pattern of activity.
Safety and the opportunity to earn interest are key reasons people put money in savings accounts. You only get those benefits if you know how to avoid savings withdrawal fees so you don't lose principal to those fees and wipe out the interest earned on your account.