Picture this: It’s your sophomore year of college, you’re a week away from spring break, ready to go home and relax for a few days. You take your car out for a spin to get some groceries and pull up to a red light. Over the sound of the radio, you hear an awful shriek.
Uh oh. Your car that worked perfectly the day before now sounds like something is very, very wrong.
Yep — this is what happened to me a few years back. Being a college student short on both cash and time, the idea of bringing my car into the shop was the last thing I wanted. But, having a six-hour drive home looming in front of me, I knew that I risked breaking down on the road or worse if I did not bring my car into the mechanic.
An hour later I received a call — my car needed new brakes, and it would cost $800. I remember looking at my roommate in disbelief as I got the news: $800?!
This sticker shock is not unique to my car experience. More than a quarter of people faced with an unexpected expense of $400 would need to borrow or sell something to cover the bill, the Federal Reserve reports.
Once I got over my initial disbelief, I realized that I could thankfully afford this $800 expense. Why? I have a savings account that I diligently add to for an occasion such as this. With a quick phone call confirming that I did want new brakes, I was back on the road in no time, and much safer than before.
I know I am lucky to possess a savings account “at the ready” for this transaction, but as the above numbers show, many Americans — including students — are not so fortunate.
By starting a savings account as a student, but adding to it slowly and consistently, you can cover unexpected expenses without breaking the bank or putting yourself into debt.
Though it may seem daunting, setting up a savings account as a college student can be relatively easy, and give you peace of mind so that the next unanticipated cost won't mean going without groceries for the rest of the week.
Why You Should Set Up a Savings Account in College
For many college students, living paycheck to paycheck seems like a mandatory part of the experience. We make so little money already and you want us to put some of it away for a rainy day? No, thank you.
It’s fair to surmise that a $400 expense would be a setback for most college students (and if it isn’t, go you!). What if the expense is more than $400? More than $1,000?
Though some may be able to pool resources to cover these amounts, three in 10 adults report being just one unexpected expense away from financial hardship, according to the Federal Reserve.
Additionally, only 32 percent of U.S. high school students save any money at all, a study published by the Global Financial Literacy Excellence Center shows.
Though many students understand the importance of saving and a savings account, for many it’s not a priority.
Life is, as we all know, unpredictable. An act as simple as bringing your car in for an oil change can end with a bill as high as $1,500 (a story of mine for another time). Having a savings account might not cover the entirety of these unexpected expenses, but it will make the burden of paying for them a lot easier to bear, not to mention lessen your stress levels.
On top of this, it will set you up for a lifetime of good financial habits. You should never depend on payday loans or high-interest credit cards to help you in a bind, and a savings account could help offset that need in both the short and long term.
More Benefits of Savings Accounts
Besides the obvious (more cash on hand!), there are a wide variety of benefits a savings account offers that you may not know.
“For one, it’s a place to get quick access to cash that’s not tied up in investments,” says Robert Beavers, a certified financial services auditor.
A savings account can also improve your understanding of your personal finances, which in turn helps your saving behavior.
“Starting early allows you to create good savings habits,” says Dan Herron, a certified public accountant/personal financial specialist at Elemental Wealth Advisors.
“As you continue to save, you will see your money grow and see the benefits of saving early, on a regular basis,” Herron adds.
Essentially, those who start saving early continue to save throughout their lives. The few dollars that you may be able to save now, can and will help you down the line. Your future self will thank you.
How to Set Up a Savings Account
Now that you know the why, it’s time to know the how — more specifically, how to set up a savings account as a student. You can start this process at either a brick-and-mortar bank, credit union, or completely online.
The first thing to consider is your interest rate options. An interest rate is the amount of money your lending institution pays you for parking your money in an account. The higher the interest rate the better, as it will allow your money to grow faster.
Pros and Cons of Online Banking
Though both brick-and-mortar and online financial institutions offer interest, online banks tend to offer higher annual percentage yields (APY) rates.
The APY is the percentage earned in one year of a savings account if the interest is compounded. Compound interest is interest calculated not only on the original principal (original amount) of your savings but also on the accumulated prior interest.
To put this into context, let’s say you have a savings account with a balance of $2,000 and an 8.5 percent interest rate, compounding once a year. Using this compound interest calculator at investor.gov, after one year you would have $2,170; at the end of five years, your account would be worth $3,013; and at the end of year 10, $4,537!
Though this may seem like a lot of math, numerous websites will calculate your compound interest for you such as the compound interest calculator listed above.
So, adding to your account as well as sticking with your chosen financial institution for a time will only further benefit your interest rate and your savings.
Online banks are also… online, which allows you to travel and go where you please without the tether of a physical branch. That being said, if you are a people person or just want some old-fashioned in-person customer service, a brick-and-mortar financial institution may be the way to go.
Pros and Cons of Brick-and-Mortar Banks and Credit Unions
A positive for brick-and-mortar as well as online financial institutions is that they carry the same insurance through the FDIC. As long as the brick-and-mortar or online financial institution of your choosing is a member, it will carry insurance for up to $250,000 per account per person.
If you open a savings account with a credit union, your insurance is through the National Credit Union Share Insurance Fund or NCUSIF for at least $250,000 as well.
If you are still undecided about what type of institution to choose, there are some avenues you can explore to get some advice. If the idea of a face-to-face conversation seems too daunting, the majority of banks both online and in-person offer chatbots on their website you can consult for basic questions.
If you prefer an in-person experience, brick-and-mortar banks make this easy and convenient. You can schedule an appointment with a personal banker at your local branch of choice to answer any questions and walk you through the process to open a savings account.
Key Features of Savings Accounts
There are some key features you should be on the lookout for in your decision-making process. As mentioned earning a higher interest rate is always better — in essence, it means your money is making money.
Another crucial feature is the balance requirements of a savings account. Some banks require their customers to maintain a minimum of $25, while other banks have no balance requirements.
If you think you can keep the required amount of money in your account at all times — great! If not, you may want to consider a financial institution that does not require a minimum balance.
Sometimes banks can be tricky and charge you fees simply for having an account. For some banks, if your account meets certain requirements the financial institution will waive their monthly fee.
For example, a financial institution may waive a monthly charge on your savings account if you can keep a minimum of $300 in your account. Make sure you pick a financial institution that meets your needs. If you are a high school or college student, you may qualify for a student account.
Documents Needed to Open a Savings Account
Now that you have information in your arsenal, the next step is to collect the documents you’ll need. For both brick-and-mortar and online banks, the required documents are similar.
The first thing you will need to open a savings account is some form of identification. This can be:
- A driver’s license
- A government-issued ID
- A passport
Next, you will need to provide the financial institution with some personal information. This can take the form of any of the following documents/questions:
- Social Security number
- Date of birth
- Your current physical address (P.O. boxes for a mailing address are okay as long as you have a physical address)
- Proof that you live your current address
- Phone number
Next Steps for Opening a Savings Account
Before you submit your application, you will need to fund your account. Most banks do not require a minimum first deposit. However, it’s good to note that depositing early also helps your account start earning interest sooner — look at you getting ahead of the game!
The final step is to submit your application. If you apply to an online financial institution or submit your application online, you may know if the financial institution accepts your request within minutes. It may take a few days however to receive your debit card, if you have requested it.
If you are opening an account in person at a brick-and-mortar bank, the process will be instant. Again, this varies from financial institution to institution.
Once you receive your account number from your bank, the next step is to set up online banking, even if you are using a brick-and-mortar bank.
Being able to go seamlessly from online to in-person banking has a wide variety of benefits.
You have the comfort of being able to do your banking from home and in-person for tasks such as depositing checks and paying bills. Depositors can also receive instant notifications through email or on their phone for deposits or overdrafts.
An online portal for banking also lets you transfer money between accounts without needing to go to a physical financial institution if you so choose.
Lastly, online banking allows you to pay bills online, making it both convenient and good for the environment as you can now opt for paperless statements.
If you have any questions about using the online banking portal, you also have the option to go to the brick-and-mortar institution and have them answered in person. Setting up online bill pay can ensure you are never late paying a bill, but you should still set aside time to look at your charges.
Account Fees: What to Watch Out For
Being a college student is expensive, and banking may be no different if you’re not careful. Here are some potential fees to watch out for when selecting a savings account as a student.
- An “out-of-network” ATM fee
- Using your account to pay bills online
- Overdraft fees
- Foreign transaction fees
- Wire fees
How to Avoid Account Fees
As mentioned earlier, many financial institutions will charge a monthly fee for users. You can avoid fees in a variety of ways such as:
- Your age: Some banks such as Bank of America will waive this fee as long as you are under a certain age (24 for example)
- How often you deposit
- How much you deposit
- Using ATMs that are in your bank’s network
- Use your bank’s free mobile banking app
- Link another account (checking for example) to your savings to cover overdrafts
- Select an account that does not allow overdrafts
How Much Money to Deposit
Now that your account is up and running, you may be wondering how much you, as a student, should be depositing in your savings account. “A savings account fund should cover three to six months of your expenses. It’s important to have a budget, to know how much you’re making and what you need to cover,” Beavers says.
Being broke college students, the idea of taking any money out of our paychecks (if we even have paychecks!) can seem daunting. But it doesn’t have to be if we do so in small increments.
There is no one size fits all recommendation for how much money you should deposit in your savings account but a good rule is to “prioritize what’s important to save for — such as car payments — and then look at extra expenses you may need to cover such as eating out,” Beavers adds.
Here are some general guidelines you can follow to begin saving money.
Setting aside only 33 cents per day every day for a month will leave you with $10 in your savings account. If you have the means to deposit more money, a $3 deposit every day for a month will leave you with $100.
These small deposits can and will add up quickly giving you a larger supply for the unexpected.
Another way to deposit money in your savings account is one that you don’t even have to do yourself. That means more time for writing papers or watching Netflix (most likely watching Netflix).
For this method, during each pay period decide how much money you want to take out of your paycheck and set up an automatic transfer from your checking to your savings account. This way, you do not have to worry — or even think about — depositing money.
This strategy is called paying yourself first. The money goes straight to your savings account, so it takes more effort to spend it. Assuming that you are using an online bank portal you can simply set up this automatic transfer online.
If you still can’t decide how much money to set aside each money there are a wide variety of apps that can help you, Blooom, Wealthfront, and PocketSmith, and others help make saving money easier by analyzing your budget and offer advice on your current spending and saving habits.
Money and Savings: How to Get Your Hard-Saved Cash
The moment has finally arrived: You need money out of your savings account. What do you do now?
That being said, the goal of a savings account is usually to accumulate money. But if you’re using your account as an emergency fund, now is the time to use it.
If you need physical cash, you can make a withdrawal at an ATM — provided you have an ATM card — or in person at your financial institution branch. You can also transfer funds from savings to checking to use on your debit card — either in person at a banking location, or via a banking app.
Savings Accounts: The Earlier the Better
Savings accounts are not only for college students and adults, but for children as well. The earlier you can get into the habit of saving the more likely you will be to continue saving throughout your life.
As well as developing beneficial savings habits, starting a savings account as early as possible also benefits your interest rates.
“Regularly contributing to a savings account, health savings account, or retirement or investment account at an early age allows compound interest to work longer for you. This can lead to having significant savings when you are ready to retire,” Herron states.
I have seen the benefits and increased interest rates from starting a savings account when I was young. As an elementary school child, my favorite day of the week was Wednesday, not because it was mozzarella stick day (although that was always a good day) but because it was banking day.
Each Wednesday a representative from the local financial institution would come and set up a stand in the lobby of my elementary school where students could make deposits into their savings accounts. Students could deposit as little or as much money as they wanted.
After each deposit, we picked out a prize from an assorted collection of highlighters and pencils (exciting stuff for an 8-year-old).
This opportunity every week not only allowed me to start funding my savings account but also made it fun to do so.
Positive rewards made me want to continue saving — so much so that I still use this savings account to this day. And look how handy that came in!
Though this program, unfortunately, does not exist anymore from my local bank, there are other opportunities for children to learn the importance of saving. Check your local community banks or credit unions to see what is available to you!
The Bottom Line
Though opening a savings account as a student may seem like a task that you don’t need to complete until after you finish your college experience, it’s better to open one as soon as you can. Starting a savings habit, and starting it early, can set you up for success later on in life. Everyone has heard of the broke college student — but do you really want to be one?
It may seem like a drawn-out process but opening a savings account can be done quickly and give you a newfound peace of mind. As the saying goes, expect the unexpected. With a savings account, you can do exactly that.