While managing extra cash is not an issue before you start being deliberate about your personal finances, once you repay your debts and start saving, you’ll quickly realize that you need a plan.
How much interest can your savings bring you? This is probably one of the first questions you’ll consider before you quickly realize that your choice of bank account that will hold the savings matters. Sometimes, this can account for the difference between simply putting away some cash and making the money in your savings account really work for you.
Maximizing your savings doesn’t depend exclusively on the accounts you use, though. You can use apps and digital tools to help you in achieving your financial goals. It has never been as easy as it is today – but you still need to remain committed. And of course, if you observe your attitude towards saving and work on your money-management habits, you can quickly turn around your financial prospects.
We will touch on all of these topics, but first, let’s review the different types of savings accounts.
Types of savings accounts
Some types of savings accounts are best for a specific purpose, like a high yield account for emergency funds. However, if you are still defining your financial goals, it’s best to learn about many different types of savings accounts, so you can choose the right one without having second thoughts.
Although the interest rate is what can make you commit to a certain type of savings account, remain mindful of all terms in view, though, because if you follow only interest rates, you might end up tying your money and it being inaccessible when you need it.
This is an account that holds between 3 and 6 months’ worth of expenses. The money is reserved for unexpected expenses, and although this is not a typical savings account, it’s the critical prerequisite before you can even start saving money. Emergency funds are used to support the household if you lose your job, to service your car, or to cover urgent home repairs. You shouldn’t start saving before you have such a fund, because otherwise, the first financial emergency will make dents in your savings.
Liquid and safe bank accounts, preferably in a different bank than the one that handles your checking account, are the best choice for emergency funds. A high-yield savings account is a good alternative, too.
High-yield savings account
On that note, a high-yield savings account is a bank account that offers high interest rates for your deposits. These services are offered by online banks that don’t have the same costs as traditional brick-and-mortar banks. They are able to offer better interest rates because they operate virtually. In fact, sometimes the rates are up to ten times higher.
High-yield savings are convenient because they keep your money out of sight and out of mind. Apart from being suitable for emergency funds, these accounts are also great when you are saving for big-ticket purchases (like appliances), for childcare expenses, or for your next vacation. Over time, you can use a high-yield savings account to achieve financial goals like a down-payment on a house, or saving enough money for a new car.
Credit union account
Credit unions function almost in the exact opposite way that banks do – they are established to benefit and protect members and not to turn profits for shareholders. The catch? You have to join, and this is not always possible. The typical eligibility criteria is to work for the employer that created the credit union, to be a member of a church or a native community, or to live within a defined geographical area. These requirements can vary, so you will need to do your homework.
But ultimately, there are definitely reasons to join one because credit unions offer higher interest rates than banks. Also, processing fees and withdrawal terms are likely to be more favorable, too.
Most credit union savings are NCUA insured – this means that your money is federally insured (up to $250,000) – in case the credit union fails. Bank accounts can be insured as well, but we will touch on that in a bit.
Certificates of deposit (CDs)
A certificate of deposit is somewhat like an agreement between a client and their bank: the bank agrees to pay a premium interest rate to the client for handing over a deposit (from 0.06% to 0.3% APY), and the client accepts that the money will stay on the account during a preset period of time (spanning from a few months to years). The longer the period (or the further away its “maturity date”), the higher the interest.
CD’s tie up your savings in the bank, and early withdrawal of the deposit attracts penalties (to be avoided if possible). Banks offer perks in return, like a fixed interest rate (or guaranteed profit if the CD is kept until maturity), but this still doesn’t make them the ideal way to keep your savings in an account. Not unless you tweak this concept a bit.
Building a ladder with certificates of deposit simply means opening multiple CDs with maturity dates that are scheduled in advance. For example, if you have saved $12,000, but you don’t want to tie them up in one CD that will mature a year from now, you can start opening one CD of $1,000 each month. That way, in one year’s time, you will have one CD maturing each month, so you will avoid paying withdrawal fees if you need $1,000 on short notice.
The same can be done with long-term CD ladders when the period is measured in years. Those same $12,000 from the example above can be spread across a longer period. For instance, you open a CD with $2,000 and a one-year maturity, then another with $2,000 and two-year maturity, and so forth. This will free up cash in your pockets, while also allowing you to take advantage of long-term interest rates (which are generally higher).
Needless to say, CD ladders are convenient when saving for long-term financial goals like a down payment for a house.
When a savings account just doesn’t cut it
There are a number of options that, at first glance, seem suitable for you to deposit your savings safely and reliablly. However, the risks they carry and the specific requirements you need to satisfy make them less than perfect.
Let’s check them out.
High-yield checking accounts
This is the bank version of a high-yield savings account. In essence, it’s a checking account with high interest rates, but you need to closely follow terms and conditions to become eligible to use them. Usually, these are: to sign up for a direct deposit and to make an X amount of debit card transactions within each month. Keep in mind that there can easily be more such requirements.
Read the fine print in the terms for these accounts to avoid losing a portion of your savings just because you didn’t invest the time to study the conditions.
Money market accounts
Money market accounts (MMA) are both checking and saving accounts at the same time. This means that you will enjoy a higher interest rate than you can get for a savings account, while also being able to withdraw cash to make debit purchases (like checking accounts). At least that’s how money market accounts work in theory.
Since MMAs are tied to the money market, the minimum balance requirement for opening an account can be quite high (starting from $2,500 and up). Also, the interest rates on MMA are supposed to be better than those for a savings account, though this is not always the case. Then there are all sorts of fees and conditions that you need to satisfy to actually withdraw. Plus, the fact that you can use your MMA for debit purchases might reflect poorly on your saving effort (the reason you opened the account in the first place) – by making the money too accessible.
Mixing your savings with your other accounts
Generally speaking, this is a bad idea. Each service that banks offer to their clients is tailored to satisfy a specific need. Placing your savings for big purchases in your retirement fund or in your college fund is not recommended.
For example, retirement accounts are designed to facilitate accumulating money across a long period of time. As such, they offer some perks, like tax-deferred accounts or the matching of contributions by your employer. While these are great for retirement funds, short-term savings should be designed to satisfy different requirements.
Let’s talk about liquidity, for instance. If you really need to, you can withdraw money from a retirement account, but this will:
- attract penalties;
- you will probably owe more in taxes;
- it will disturb your projection for the retirement fund.
It’s simply not worth it to disrupt your other financial goals just because you didn’t do the due diligence on appropriate saving practices.
Bonds are investment instruments, and every investment includes a level of risk. Let that sink in. Granted, bonds are one of the most reliable investments out there (way safer than stocks), and they can deliver some interest for tying your money in with a company or the government.
At the same time, bonds are affected by movements in the market. In plain terms, if interest rates go up (decision made by the Fed) the value of the bond goes down. In this scenario, you will be looking for a willing buyer that can handle the risk. But what if you don’t find one?
While bonds might seem attractive for those who don’t expect to use the money for some time (for example, if they’re saving for a down payment on a house), there are a number of alternatives, like CD ladders, which can offer better security than a bond. Plus, savings accounts can be insured, and bonds can never beat this.
Savings account tips
As with most products nowadays, you might consider shopping around if you want to find the best account for achieving your financial goals. Some recommend that you be on the lookout for banks that offer introductory bonuses – practically, they add to your savings simply because you transferred your money to their institution.
In essence, there is nothing wrong with doing so, just keep in mind that free stuff comes with conditions and terms you need to follow to the letter. Most banks bank (pun intended) on you not reading all the terms, or you being too lazy to switch banks once the offer loses its attractiveness. In these instances, your savings will suffer.
It’s not all grim though, as a bank is probably the safest place to keep your savings. This is because a special government-backed body (the Federal deposit insurance corporation) was set up in the 1930s to insure clients with savings of up to $250,000 if the bank fails. So, look for a bank that offers FDIC-insured savings accounts. There is a caveat though: look if the specific product (or type of account) you are after is FDIC insured because this doesn’t apply automatically to every account. Aside from that, you can even calculate the coverage you can enjoy.
Use technology to increase your savings
As we mentioned in the introduction of this article, technology has opened the gates to simpler financial management, and this will help with your savings, too.
Automate the process
The most straightforward example of automated savings is to set up transfers from your checking to your savings account with the help of an app. You can set these automatic transfers to be arranged once your account has fresh income. That way, you can avoid paying overdraft charges to the bank.
Use a budgeting app
Budgeting can be done with traditional means (pencil and paper, or envelope system), but going for a digital app that would help you distribute your income across different spending categories is very handy. Most apps will allow you to have a fund with a specific purpose (for example, a professional manicure set or woodworking tools) and this can help with motivation. Also, digital budgeting tools provide charts and graphs to easily visualize your expenditures. You can even project your budget a few months in advance based on data from the past.
Use a round-up app
This is practically saving on spare change. The method is old, but a number of apps allow you to do this digitally by rounding up purchases to the dollar. Originally, these apps were developed so your “spare change” can be invested on the market, but now you can divert those funds at your liberty. The rest is at your discretion: you can collect the money in a savings account or you can use it to patch up your monthly budget.
Money management habits
Sometimes adopting a couple of saving habits can increase your savings. They can help you boost the benefits you enjoy by choosing the appropriate type of account and using technology to streamline the process.
Save as if you are indebted to someone else
Some people find it very helpful to consider saving as a debt to their future self. On the surface, this is just a play on words, however, given the way our brains operate – the difference is pivotal. It’s known as the “pay yourself first” approach and it can significantly increase motivation and discipline. So, once you receive the next month’s income, start processing it by separating the money for your savings from the rest.
Don’t blow recently freed up money
People tend to be reckless with money that was earned without much work. We are talking about every income that is different from a regular paycheck – passive income (like royalties), tax returns, or stimulus checks.
This also happens once you’ve paid off a loan (for example, a car loan) and you suddenly have extra dough on your hands. Resist the urge to spend the money on convenience. Instead, try to reallocate, at least a portion of it, to your savings account. Before long, you will become aware of the amount of money you’ve spent on trivial pleasures over the years.
Keep your savings inaccessible
You want your savings to be liquid (and you want to be able to withdraw them on short notice), but not easily accessible. Some people intentionally add an extra hurdle that would force them to think twice before reaching for the savings account for monthly budgeting. Typically, this is done by placing savings in a different bank than the one you use for the checking account.
If you are still tempted (and occasionally do spend some of the saved money to cover regular costs), you can go a step further. When the bank offers a free debit card along with the savings account, you can straight out refuse to take it. While the card is extended to you as a perk, the opportunity to reach for saved money is actually the opposite – the bank is encouraging you to spend. If the card is essential to the account and you can’t say no, keep it hidden away in a drawer at home. Don’t carry it in your wallet to avoid using it when you are triggered by your regular impulse to purchase.
Also, double-check your budgeting if you find yourself reaching for the savings account to get by. Maybe you need to lower the percentage of your income that goes into savings. There is nothing wrong with a low yet consistent saving threshold.
Fortunately, saving money doesn’t require a dramatic change in your income stream – only a change in your attitude. It doesn’t mean that you need to lead a frugal lifestyle, nor deprive yourself of meeting your basic – and slightly less basic – needs. If you have clear financial goals and you use budgeting tools strategically, you can pile up savings in the account that works best for your needs.
In essence, this is a balancing act. Keep your savings away from your investments and stick to the right mindset. In time, you will see your wealth grow.