Many overlook the differences between Current and Savings Accounts and fail to recognize why one may be more advantageous than the other in certain circumstances. Most think that Savings Accounts are just for saving money, and Current Accounts are only for people with lots of money. But that is not entirely true, as there are many things to consider when choosing between them.
February 14, 2024
-8 mins read
Chizitere
Content creator
The current issue of fluctuating Naira and rising cost of living in Nigeria brings about the need for effective money management which is essential for maintaining financial stability. Consequently, knowing how different bank accounts work becomes very important when it comes to financial planning.
Very often people confuse between Current Account and Savings Account without knowing why one may be more useful than another in some situations. As a matter of fact, the common misconception among most individuals is that savings accounts are meant for saving while current accounts are meant for those who have a lot of money. However, this is not entirely true since there are also other factors that need consideration before choosing between the two accounts.
A Current Account is a kind of deposit account where both withdrawals and deposits can be made. It has high liquidity, which allows its holders to write cheques and use automated teller machines (ATMs) and other electronic banking systems. Unlike other types of accounts, withdrawals from a Current Account can be done as many times as possible and an infinite number of deposits can also be made.
1. Unlimited Transactions: Current Accounts allow for unlimited transactions, withdrawals, transfers, and bill payments. This aspect of the current account is primarily designed for individuals or businesses that have frequent financial activities.
2. Overdraw Facility: Current Accounts have an overdraft facility that permits customers to withdraw beyond the balance they have, up to a predetermined margin. Such provision for a Current Account is convenient for managing temporary cash flow fluctuations or unforeseen expenses.
3. Cheque Issuing: Current Accounts often allow writing cheques, making it easier to pay back merchants, suppliers, or individuals. Online banking platforms often have features such as merchant service facilities designed to help business people receive payments.
4. Supports Expansion of Businesses: Current Accounts are helpful in managing business funds and personal money separately as they track income and expenditure differently. This aspect helps a company follow its growth rate and maintain accurate financial statements.
A Savings Account is widely available and offered by all banks and financial institutions. It serves as an interest-earning deposit account tailored to accumulate funds gradually while garnering interest on the deposited sum.
The provision of attractive interest rates often encourages a culture of savings to fund contingencies and plan for the future like an emergency fund or allow money to be saved towards more basic goals like mortgage, educational expenses or even buying a car.
1. Interest Earnings: Among the major features of a Savings Account is its ability to earn interest on deposits. All savings accounts offer this benefit so that their users get compound interest for a long time.
2. Liquidity: Though meant for long-term savings, Savings Accounts are easily accessible when money is needed. Most banks allow unlimited transfers or withdrawals at any time but may impose some monthly limits on the number of transactions allowed.
3. Risk Management: Savings Accounts do not offer an overdraft facility as it does not allow for withdrawal beyond the available bank balance. This is done to encourage the culture of saving.
4. Emergency Savings: Savings Accounts provide an opportunity to save cash that might help with unexpected activities like health facility payments and car protection.
It is very important to understand the distinctive features of Savings and Current Accounts as well as their suitability for various financial needs:
1. Purpose of the Account: Savings Accounts often serve as emergency funds, preserving money needed for future goals. It is an account for people who would like to save plus have a steady stream of income. Current Accounts, on the other hand, are a kind of account that suits business owners or entrepreneurs who require regular access to money in order to carry out activities such as receiving payments, withdrawals, and payment of bills.
2. Interest Rates: Savings Accounts pay interest on deposits which allows depositors to make some profit on their savings. Current Accounts are mostly transactional and do not offer any interest.
3. Transaction Limit: Current Accounts satisfy the needs of businesses that often carry out day-to-day transactions by allowing unlimited transactions. In contrast, a Savings Account sets daily withdrawal limits in an attempt to encourage saving rather than excessive spending.
4. Fees: Savings Accounts tend to have lower rates and some banks even waive fees based on specific requirements such as maintaining a minimum balance. Current Accounts, on the other hand, may incur higher fees and charges, including maintenance fees, transaction fees, and overdraft fees, to cover the costs of frequent transactions and services
5. Overdraft Facility: Current Accounts often offer the opportunity for overdraft facilities, allowing account holders to temporarily exceed their available funds to address cash flow issues. This option is not available for Savings Accounts.
6. Minimum Requirement: Both Savings and Current Accounts have a minimum deposit requirement, but the minimum requirement for a current bank account is higher compared to a savings bank account.
When deciding which account type to open, it is important to consider several factors before selecting between a savings account and a current account.
A Current Account is suitable for running a business that requires frequent transactions as it offers limitless transactions compared to a savings account. With a feature known as an overdraft, it allows account holders to spend more than they have available in their accounts. However, a Savings Account can be a preferable choice for personal objectives like purchasing an item, or saving towards the future as it makes provision for interest over time but prevents frequent withdrawals of funds.
A Current Account is a good option for an account holder who performs transactions regularly. However, a Savings Account is ideal for an account holder seeking to cultivate good money management skills and do not need to spend money frequently.
In choosing a type of account, it is important to examine the restrictions and fees pertaining to both accounts to figure out the best choice. Savings Accounts offer interest rates and monthly fees to maintain the account which is a suitable choice for account holders looking for a long-term saving plan. Current Account, on the other hand, offers higher fees due to the frequent transactions.
In deciding between both account types, the minimum balance requirement should be taken into consideration. Savings Accounts require a lower minimum balance to be kept in the account as opposed to Current Accounts which require a higher amount as minimum balance.
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