Saving money can be a challenge, especially for those with a lower household income. To help individuals and families with lower incomes save, some financial institutions offer a type of bank account known as a micro saving account. A micro savings account works similarly to a traditional savings account, but it’s designed for consumers who can only make small deposits. It can also be helpful for anyone else who finds that stashing away small amounts suits them. Regardless of your income, if micro saving suits your financial style, it can be a win-win.
Here, you’ll learn:
• What is a micro savings account?
• How are micro savings accounts used?
• The pros and cons of micro savings accounts.
• Alternatives to a micro savings account.
What Is a Micro Savings Account?
A micro savings account (also sometimes seen written as microsavings account) is a savings account that can help meet the financial needs of consumers with smaller household incomes. It can also suit any saver who likes to tuck away small amounts here and there.
A micro savings account works a bit differently from how a savings account works at most financial institutions. Micro savings accounts typically don’t have a minimum deposit requirement, don’t charge service fees, and are more flexible regarding the possible amount of withdrawals.
Many financial institutions that offer micro savings accounts do so to incentivize consumers to save $1,000 a year by encouraging them to save just $20 a week. They often have educational initiatives in place to help guide micro savings account holders towards meeting this goal.
Benefits of Micro Savings Accounts
The following benefits are typically associated with micro savings accounts:
• Low-risk savings account that can earn interest
• Little to no upfront costs
• No credit checks required for new account holders
• Additional microfinance services such as microloans may be available for account holders
• Lower or fewer fees or no fees at all
• No minimum account balance requirements
• More flexible withdrawal limits
Disadvantages of Micro Savings Accounts
There aren’t any real disadvantages associated with micro savings accounts. That said, here are a few small downsides worth considering:
• Savings accounts tend to have a smaller return than other forms of investing (such as a CD vs. a savings account)
• Micro savings accounts can be harder to find than normal savings accounts
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What Are Micro Savings Accounts Used For?
Let’s take a closer look at what micro savings accounts are used for. The reasons why people tend to open them include:
• Creating a regular savings habit
• Saving money consistently in smaller amounts
• Keeping savings separate
• Managing money through a mobile app
Here’s a closer look.
Creating a Regular Savings Habit
Micro savings accounts can help savers boost their liquid assets at an incremental level while giving them the chance to earn interest on their savings. Financial institutions offer micro savings accounts to help encourage good saving habits. These accounts can help remove barriers to saving for those who can’t afford to put away a lot of money. They can also suit those who like to save a little money here and there.
Saving Money Consistently in Smaller Amounts
One of the ideas that drives micro savings accounts is the concept that consistently saving small amounts of money can add up and make an impact. It may not seem that worthwhile at first glance, but setting aside $10 a week can help make a difference. That sum can begin to build a savings fund that can help consumers meet their financial goals or avoid taking on debt when unexpected expenses arise.
Keeping Savings Separate
Storing money in a checking account makes it a lot harder to ignore when spending temptations arise. By keeping money safely stored in a savings account (where it can grow slowly but surely if not touched) can make it easier to keep it separate from spending money. Maybe you are saving for a vacation or you need a new washer/dryer. Whatever your goal is, when the time comes that you are wondering, “Can I spend money from a savings account?” the funds will be there for the taking.
Managing Money Through a Mobile App
Today, lots of people love the convenience of using apps for P2P transfers and other activities. That ease is available with the many micro savings accounts that can be managed through mobile banking accounts. These can make it simpler to monitor spending and saving.
There are also micro savings apps (like Acorns and Stash) that have automated savings features that make it easier to save small amounts of money.
Alternatives to Micro Savings Accounts
If you don’t find a micro savings account that meets your needs, there are alternative saving options that can offer similar benefits. Here are two options worth considering.
• Credit unions: Because credit unions are member-owned, unlike not-for-profit financial institutions such as banks, they tend to charge less fees and offer higher interest rates on savings. Applying to a credit union where you can consider opening a checking vs. savings account (or perhaps both) may be able to replace the purpose of a micro savings account.
• High-yield savings accounts: High-yield savings accounts work the same way that normal savings accounts do but they tend to have a much higher interest rate on deposits. A high-yield savings account is a great way to take advantage of the power of compound interest and help your money grow faster.
These savings accounts can often be found through online banks. Because these institutions don’t have the overhead of bricks-and-mortar locations, they may be able to afford to offer higher interest rates.
You don’t have to do anything differently than you would with a normal savings account to earn this extra interest. You can add small deposits as funds become available.
Recommended: A Guide to High-Yield Savings Accounts
Saving money is hard and requires a lot of discipline. Micro savings accounts are designed to help those with lower incomes or who simply like to save little by little. These accounts typically allow you to make small contributions, charge fewer (or no) fees, and have lower minimum balance requirements. Having the right savings account can make it easier to meet your financial goals. These “slow but steady” savings tools can help you progress on the path to financial wellness.
Another way to save successfully: Open a new bank account with SoFi. When you sign up for Checking and Savings with direct deposit, you’ll earn a competitive APY on savings, and don’t have to pay any account or overdraft fees. (If you direct-deposit $1,000 or more monthly, you’ll be able to access your paycheck up to two days early.)
How do I create a micro savings account?
Creating a micro savings account works the same as opening any type of savings account. First, you will need to open a bank account or just the savings account by filling out an application and providing the necessary identifying information and documentation. Once you’ve opened the account, you can start making contributions to the micro savings account.
What are the advantages of micro savings?
The main advantages of micro savings accounts are rooted in accessibility: These accounts tend to have no or lower account fees, have smaller or no minimum account balance requirements, and have more flexible withdrawal options. They make it easy to save with small contributions. Many financial institutions that offer micro savings accounts also offer educational initiatives and mobile banking apps that make it easier to learn how to save more money.
Are micro savings apps worth it?
Yes, micro savings apps are worth downloading, as they can make it a lot easier to achieve savings goals. Alongside making it easier to track spending and saving habits, micro savings apps even have automated savings features that make it easier to stash away small amounts of money.
Photo credit: iStock/princessdlaf
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