Last week's blog touched on how to save. Let's discuss ideas on where you should keep those savings. Having a specified savings account can be beneficial to help you meet savings goals. It can be hard to look at one account and see that you have a good amount stored in it, only to realize a good portion is supposed to be for savings, not that spur of the moment weekend trip with your friends. By placing your money for savings into its own account, you can make sure you are only spending what you should. A general savings account is okay but there are better alternatives.
The most important things to think about for your savings account are when you will need access to the money (monthly or yearly?) and the annual percentage yield you are hoping for. Ideally, savings should only be dipped into for certain predetermined expenses like that new car you've needed. However, things come up unexpectedly and cannot always be helped.
If you know you will need to take money out of your savings within the next six months, consider:
High Yield Savings Accounts: Lower interest but more accessible
- Typically have a low annual percentage yield (APY); however, money can be withdrawn more easily than with other accounts
- Savings accounts have a 6 time per month limit for withdrawals
Money market Accounts: Higher interest than savings accounts but slightly less accessible
- Six time per month limit usually still applies
If you know you will not need to take money out in the next six months, year, or longer consider:
Certificate of Deposit (CD): Highest interest but penalties for early withdrawal
- Savings certificate with a fixed maturity date and specified fixed interest rate
- Must agree not to withdraw the money for a certain amount of time (times vary from six months to five years)
If you have no current savings, start small with what you can afford and start to build it up. While the APY for most small accounts won’t result in much money gained, it can add up to larger sums if you really try to stick to a savings plan per month and build up a good store. And hey, even if you only make $30 in interest over a year, that’s money you got for simply doing nothing and leaving your savings alone.
Check out our savings calculator to see how long it will take you to reach certain savings goals. You can play around with monthly savings, rate of return, and years to save.
https://www.oxfordplanning.com/resources/calculators?view=calculator&id=28
If you have a goal of savings $10,000 and already have $1,500 in savings, how long will it take to reach that goal? By putting $400 a month into savings, you can reach your goal in 1 year and 9 months. If you can put $550 into savings each month that cuts down the time by 6 months.
Important Notes:
- Make sure that your savings plan is realistic. Make sure you are budgeting enough for groceries, rent, utilities and any other monthly necessities. If you can't meet your goal with your current budget, consider taking on a small part time job to make some extra money.
- If you decide that one of these savings accounts is for you, do your research. Different banks offer different percentage yields. Some also require a minimum amount of money to open the account or charge a fee. Shop around and look at comparisons to determine the best option for you.
Whichever type of account you choose, don’t wait-start today!
Stay tuned next Friday for our post about understanding you 401(k) options.
Author: Kirsten Eddy, Junior Portfolio Analyst