Know where to save your money

Savings for short-term goals might be kept in an interest-bearing money market or simple savings account, but savings for a home down-payment might be kept in a certificate of deposit (CD). A lot depends on when you will need your money.

Simple savings account

Pros:

  • Interest earning (although at extremely low rates)
  • Possible direct deposit of portions of paycheck
  • Easy access
  • Money is insured

Cons:

  • Extremely low interest rates
  • Unlikely to beat inflation
  • Fees
  • Possible minimum balances

Money market account (MMA)

Pros:

  • Interest earning, usually greater than simple savings account
  • Easy access
  • Money is usually insured

Cons:

  • Limits on withdrawals
  • Higher balance minimums
  • Fees

Certificate of deposit (CD)

Pros:

  • Higher interest than simple savings account
  • Interest may compound more often
  • Money is usually insured

Cons:

  • Money is locked for a specific time
  • Penalties for early withdrawal
  • Minimum deposit required

U.S. savings bond

Pros:

  • Issued by the U.S. Treasury
  • No state or local taxes
  • Exempt from federal taxes if used for higher education
  • Low minimum deposit
  • Fixed rate up to 30 years usually higher than savings

Cons:

  • Money is locked in a long maturity time frame
  • Interest accumulations only paid when bond matures
  • Penalties for withdrawal in first five years

Match your savings product to the time period for your goal. For example, emergency funds should be kept in an easily accessible savings account. Interest rates for these types of accounts will be much lower than investment products such as stocks and bonds. Your money still grows because of compounding interest, but at a much slower rate.

It pays to shop around at banks and credit unions to compare savings products. Be sure to ask about:

  • Minimum balance requirements
  • Current annual percentage yield (APY), or the actual amount you are paid including compounded interest
  • Compounding frequency — how often the interest compounds, e.g., monthly, quarterly, yearly
  • Fees or penalties you for things like monthly maintenance or excessive withdrawals
  • Insured amounts by either the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Association (NCUA)
  • Student account offers and discounts

For better earnings on your savings, consider products that match your goals and capacity for risk. Your risk tolerance, or the degree of uncertainty you are willing to accept to achieve potentially greater rewards, boils down to your “fear factor.” For example, an investment in stocks and mutual funds through an employer’s 401(k) program can yield higher growth than other savings tools, if you can tolerate the risk of potentially losing some money in the stock market.

Investments like stocks, bonds or in 401(k) programs are meant to grow for long-term needs over periods of 20 years or longer. Read more in the article Saving or Investing: Which is Better for You?.

 

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