Savings Accounts

Definition

A savings account is a type of bank account that allows individuals to deposit money and earn interest on the balance. Savings accounts are a common way for people to save money for future expenses or emergencies, and they are an important component in the measurement of money supply, specifically in the context of M1 and M2.

5 Must Know Facts For Your Next Test

1. Savings accounts are included in the M2 money supply, which is a broader measure of the money supply than M1.
2. The interest earned on savings accounts is taxable income, and the interest rate can vary depending on the bank and economic conditions.
3. Savings accounts are generally considered to be a low-risk investment, as the deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to a certain limit.
4. Withdrawals from savings accounts are typically limited to a certain number per month, and there may be penalties for exceeding this limit.
5. Savings accounts can be used as a way to save for short-term goals, such as an emergency fund or a down payment on a house, or for long-term goals, such as retirement.

Review Questions

• Explain how savings accounts are included in the M2 money supply and how this differs from the M1 money supply.
  • Savings accounts are included in the M2 money supply, which is a broader measure of the money supply than M1. M1 includes only the most liquid forms of money, such as currency in circulation and demand deposits (checking accounts). M2, on the other hand, includes M1 plus less liquid forms of money, such as savings accounts, small-denomination time deposits, and retail money market mutual fund shares. The inclusion of savings accounts in M2 reflects the fact that these accounts can be easily converted into cash and used for transactions, even though they are not as liquid as checking accounts.
• Describe the key features of savings accounts that make them a low-risk investment option.
  • Savings accounts are generally considered a low-risk investment option for several reasons. First, the deposits in savings accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to a certain limit, typically $250,000 per account. This means that even if the bank fails, the account holder's deposits are protected. Second, savings accounts typically earn a small but stable interest rate, which provides a low but consistent return on the account balance. Finally, savings accounts are highly liquid, meaning that the account holder can easily withdraw their funds when needed, without the risk of losing principal like with other investment vehicles.
• Analyze the role of savings accounts in an individual's financial planning and how they can be used to achieve both short-term and long-term goals.
  • Savings accounts play a crucial role in an individual's financial planning, as they can be used to achieve both short-term and long-term goals. For short-term goals, such as building an emergency fund or saving for a down payment on a house, a savings account provides a safe and accessible place to store funds that can be easily withdrawn when needed. For long-term goals, such as retirement, a savings account can serve as a low-risk component of a diversified investment portfolio, providing a stable source of income and a safe haven for funds that will be needed in the future. By using a savings account as part of a comprehensive financial plan, individuals can ensure that they have the resources to weather unexpected events and work towards their long-term financial objectives.

Related terms

M1 Money Supply: M1 is the narrowest definition of the money supply, and it includes currency in circulation, traveler's checks, and demand deposits (checking accounts).

M2 Money Supply: M2 is a broader measure of the money supply that includes M1 plus savings accounts, small-denomination time deposits, and retail money market mutual fund shares.

Interest Rate: The interest rate is the amount of interest paid by the bank to the account holder, typically expressed as a percentage of the account balance.