There are many ways to save and invest your money, whether you’re putting away for a special occasion, a purchase, retirement, college, or something else. While you’re saving, it’s good to remember that your money can make you MORE money while it’s in savings. It does this by accruing interest or dividends (depending on whether you work with a credit union or a bank).
How can you make more on your savings accounts? It takes a little thought, but it’s actually pretty simple. Just choose the right account for the type of money you’re saving. In other words, if you are saving for a new boat, you will want to keep your money in an account that you have access to, but not necessarily an account that allows a lot of transactions per month (accounts that restrict use may offer higher interest rates than those you have free access to).
So what’s out there and how do you determine when and where to save your money? Here are the basics.
THE SAVINGS ACCOUNT
A savings account is your most basic savings tool and the best place for keeping funds you need regular access to. This is the money you will need to cover emergency expenses, or help you weather the loss of a job.
As a general rule, you should keep three months’ worth of expenses tucked away. If this seems like a lot, don’t worry. You can build up to it slowly by reducing your debt and saving a little each month. Simply figure out how much you need to save and transfer a set amount (as much as you can afford) to your savings account when you deposit your paycheck each month. To simplify the process, you can set up a recurring automatic transfer from your paycheck to your savings account.
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DEDICATED SAVINGS ACCOUNTS
Once you have your cushion (savings) account padded with three months’ worth of wages, you can start thinking about saving for large items you want—a vacation, a car, or some other large purchase or experience. A good way to do this is to open a secondary, dedicated savings account.
This dedicated savings account won’t necessarily offer a higher interest rate, but is useful because it allows you to separate your everyday savings from your special purpose savings. This can be really helpful. For example, I paid my car off in March and started another savings account for my next car. Since I was already used to making payments, it was easy enough to make the payments into a savings account rather than to a dealership. When I’m ready to replace my current car, I’ll have the money for a down payment, which will help keep my next car payment lower.
MONEY MARKET ACCOUNTS
Money market accounts are a cool hybrid account. You tend to get a higher interest rate, like you might with a certificate of deposit; you have full access to your funds, like you do with a savings account; and you can write checks, like you can from a checking account. This is a very unique type of account.
In this account, you will want to save money for something that won’t require you to withdraw funds regularly from the account because they do not, as a rule, come with a debit card and you can only make so many withdrawals or payments from the account.
A money market account is a good place to save for insurance or property tax payments. This can also make a good place to save for a specific purpose, but you’ll have to be mindful about how many transactions you’ll need to make per month.
CERTIFICATES OF DEPOSIT
Certificates of deposit (CDs) are considered local investments because they are a relatively long-term investment that is not traded on the stock market—your credit union or bank services these in house—and is federally insured by the National Credit Union Administration (NCUA) or the Federal Deposit Insurance Company (FDIC).
CDs generally offer a higher rate of return than other deposit products because they require that you don’t touch your money for a longer period of time (usually a year or longer). Generally, you will be penalized if you withdraw before the CD’s maturity date. If you have excess money, this is a great place to put it and earn more.
The longer you’re willing to invest, generally the higher the rate will be. If you’re comfortable with five to six year term, that’s where you’ll get the better rates and you’ll be locked in at the higher rate for the full term, regardless of whether interest rates go down during the CD’s term.
One thing to keep in mind, when it comes to CDs, is that they do often require a minimum balance in order to earn the premium interest. Not all minimum requirements are the same, so while you’re shopping around for rates, you can also shop around for a minimum balance that fits your budget.
INTEREST CHECKING ACCOUNTS
Checking accounts don’t pay much for interest, because money tends to flow so freely through them. However, if you can get an interest-bearing checking account, they can be a nice way to earn a little more on your money. Just make sure there is no minimum balance, or that the minimum balance is easy to maintain. Some banks charge a fee if you go below the minimum balance (which kind of defeats the purpose, don’t you think?). As you’re comparing checking accounts, look into what other fees or charges will affect the account because they may negatively offset interest you earn. Also find out if there are transaction limits on the account that may restrict access to your money.
RETIREMENT ACCOUNTS—IRAS AND 401(K)S
If your employer offers matching payments on your 401(k) retirement account, I strongly encourage you to take advantage of the offer. If you don’t, you’re leaving money on the table. If your employer doesn’t offer a retirement account and you want to set aside money, an Individual Retirement Account (IRA) is a great option.
There are two main types of IRAs: the Traditional IRA and the Roth IRA. Traditional IRAs are tax-deferred, which means you don’t pay taxes until you withdraw the money, allowing you to save more each month. With the Roth IRA, you pay taxes on the money before it goes into the IRA, which means you won’t have to pay taxes on that money later. There are pros and cons to both, so you’ll want to do a little research or speak to your financial advisor before you choose the best option for you.
When it comes to IRAs, the earlier you begin contributing, the more your savings will multiply. You will want to work with a financial adviser to make sure you are investing enough, in the right type of account, and at the ideal risk level for you. Most advisers will meet with you for free initially, which gives you a chance to see if they are a good fit for you. A lot of people think of financial advisers as a consultant only wealthy people can afford, but that’s not true. It’s important to talk to a professional regardless of your income level, because they can help you determine how to make the most out of the money you have.
CONSIDER THE OPTIONS
By spreading your money out over a number of accounts, you can keep money handy for your daily expenses, while earning more on excess savings. Even if you don’t have a lot of money, work with a financial adviser to make sure your money is invested well. Regardless of which account you are looking into, shop around to make sure you get the best interest rates and lowest fees, and to ensure that you can keep up the minimum balances. All financial institutions are different, so take some time to compare and contrast and find the best deals.
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