Boost Your Savings
You’ve spent time learning ways to build financial security by developing a workable spending plan that includes making automatic deposits into a savings vehicle each month. We will now explore savings options for short-term goals such as building an emergency reserve, purchasing a home, or planning a vacation, etc. This section includes an overview and resources of the following:
- Choices in banking options (banks, credit unions and brokerage firms)
- Types of checking and savings vehicles available and tools and resources to help you assess which option is best for you.
- Tools to help you organize your financial records.
- Information about where you can learn more about savings and investment tools including what you should know about working with a financial planner.
Where you bank makes a difference. Make sure you choose a bank that meets your needs, as well as one that is a financially stable institution that insures your deposits. A financial institution that insures your deposits provides you with a guarantee that your money is safe if there should be a problem with that institution your money is insured.
Types of Financial Institutions
- Banks (Commercial Banks, Mutual Savings Banks and Savings and Loan Associations)
- Credit Unions are non-profit financial cooperatives that are owned and controlled by their members, who may use their services. In some instances, their fees may be lower but they may not offer the same variety of banking products. However, they may offer higher interest rates on deposits. Many companies, unions,state and local governments, and communities have credit unions you may qualify to join, so you may want to explore this option .
- Brokerage Firms may offer money market funds with check-writing privileges, bank cards, or other banking services as well as investment services.
Types of Account Insurance
Do business only with financial institutions that announce in writing that they are federally insured by one of the following:
FDIC, the Federal Deposit Insurance Corporation, insures up to $100,000 per account holder at commercial banks, savings banks, and savings and loan associations.
NCUA, the National Credit Union Administration, insures up to $100,000 per account holder at all federally chartered credit unions and most state chartered credit unions.
SIPC, the Securities Investor Protection Corporation, insures money invested in brokerages (be sure to ask the brokerage firm to explain how this insurance works).
SIPC does not protect against losses due to the market fluctuations of customers’ investments.
Resources to Help you Evaluate the Financial Stability of the Institution
- Call VERIBANC research service which rates financial institutions and insurance companies
- Research the Safe and Sound ratings guide at www.bankrate.com.
Choosing an Account
All types of financial institutions offer similar banking services, yet particular service features and fees vary widely. The only way to select wisely is to shop and compare. Always consider at least three alternatives before making a decision.
When looking for an account, take this checklist with you. The question below can help you choose an account that is right for you.
Pay Yourself First
We’ve already reviewed the importance of paying yourself first. Once you’ve developed your budget and/or decided how much you want to put into savings each paycheck, you’ll need to decide what type of account is right for you. Here are some basic questions to ask yourself:
What is my savings goal?
When will I need this money?
When it comes to choosing a savings account, high interest rates, low bank fees, and convenience are all important considerations. The goal is to find the account that best meets your needs.
Savings Options for Short-Term Goals
If you are exploring options for savings for an emergency reserve fund, a home purchase, a vacation, or any other short-term goal, be sure it is an option where your principal (the money you invest) is protected and where you can access the money in the timeframe you will need it. Here are some examples:
Statement Savings Accounts are accounts that earn interest. If you have a statement savings account, you will usually receive a monthly or quarterly statement that lists all your transactions.
Money Market Accounts with these accounts, the initial deposit and minimum balance are usually higher than a savings account, but the interest rate may also be higher.
Certificate of Deposits (CDs) are accounts where you deposit a set amount of money with a financial institution for a set period of time, such as six months, one, two, or five years, and gain a fixed amount of interest. You usually earn a higher rate of interest than in a regular savings account. The longer you promise to keep your money in a CD, the higher the interest rate. Be sure to think about your cash needs and savings goal (when do you need the money) before opening a CD because you will pay a penalty if you withdraw your money early.
How Money Grows
Why should I care about APY?
When comparing savings accounts, be sure to check the annual percentage yield (APY). The APY figure takes into account not only the interest rate, but also how often interest is paid. For example, an account that earns simple interest, meaning interest is compounded just once a year, would have a lower yield than an account that compounded interest daily or monthly. Annual percentage yield (APY) allows you to see how much your account will actually earn in one year, providing you don’t make any withdrawals.
Key Words to Understand
Simple Interest – interest that is paid on principal only.
Compound Interest – interest that is paid on the original deposit plus previously reinvested interest. Interest can compound on an annual, semi-annual, quarterly, monthly, or daily basis. You want your interest to compound as frequently as possible to maximize the accumulation of your savings over time.
When shopping for a savings tool that is right for you. Remember to ask:
What is yield or annual percentage yield (APY)?
How does the interest compound?