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SAVINGS ACCOUNTS |
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Overview Most financial institutions use your money to make money. They do this by:
Through the process, financial institutions hope to bring in more money than they’re paying you. In exchange for the use of your money, the financial institution pays you interest. The simple savings account is a pumped-up version of your piggy bank, except that the savings account pays interest and is absolutely safe, since the bank is insured by the Federal Deposit Insurance Corporation (FDIC), a government agency. Even if the bank becomes insolvent, the government guarantees the return of your money up to $100,000 in most cases. The Savings Association Insurance Fund (SAIF) is part of the FDIC and insures savings and loans. With a savings account, you have easy access to your money. Usually, however, you may not access your savings account with a debit card or a check.
Earning Interest The interest rate for savings accounts is relatively low. You’ll see two figures in bank advertisements:
The APY presumes that you do not withdraw the interest you have already earned during the year. You earn interest on your original savings and the interest on the earnings in your account. Restrictions on accessing your money Although savings accounts have few if any restrictions on accessing your money, you should refrain from making withdrawals if:
Most savings accounts impose minimum balance requirements. Accounts that fall below the threshold are subject to termination or maintenance fees; they may also not earn interest. A maintenance fee might be higher than the interest rate you’re receiving, which means you’re losing money in your savings account. Rule of 72 Even if you’re not a math major, you can easily calculate how long it will take for your money to double at a particular interest rate. You can perform that calculation with the Rule of 72. The Rule of 72 illustrates why it is so important to get a higher return on your investment. Here’s how the rule works:
Tips & Common Mistakes Common mistake: Keeping all of your savings in a savings account You may settle for a savings account because you’ve put money there all your life. You also might like being able to tap your account on a moment’s notice. The down side, however, is that keeping your money in a savings account might delay your plunge into true investment vehicles, which pay a higher interest rate or return on your money. Some of those investment vehicles give you ready access to your funds and about the same level of safety. They also stand a better chance of keeping pace with inflation. Tip: Learn about your options before making an investment As you stop in at banks to learn more about savings accounts, you may be directed to a person selling other kinds of investment products. Those products are not insured by the FDIC. It’s best to hold off on those conversations until you become fully acquainted with all of your investment options that are FDIC protected. Tip: Get the interest you’re due Before closing a savings account or making a withdrawal, make sure you receive all of the interest to which you’re entitled to that date. You may not get credit for some of your interest if you make a withdrawal before the end of the month or quarter.
Getting Started Whether you shop around for a savings account in person or on the Internet, you should compare the:
To become an investor, you need to build a nest egg. You can arrange for a small amount to be deducted automatically from your checking account each month and deposited in your savings account.
FAQs Should I keep my emergency fund in a savings account?All of us face unexpected expenses, whether it’s a major car repair or our computer crashing for good. To cover those contingencies, you should set aside money in an emergency fund. While you could use a credit card for unanticipated expenses, the charge might exceed your credit limit and you could face extremely high interest rates. To cover these contingencies and who knows what others, most financial experts recommend that you keep three to six months of your income in an emergency fund. Even after you’re working, you can’t count on a regular paycheck. Your emergency fund gives you a cushion during a period of unemployment or if an accident keeps you from working. Your emergency fund doesn’t have to be kept in your sock drawer, especially since you might be tempted to spend it. You should look for an investment vehicle that has no restrictions on accessing your money. A savings account fits these requirements; however, a money market account usually pays higher interest and, therefore, is usually a better place to keep your emergency fund. What is a callable CD? A callable CD is one that can be terminated or called back by the financial institution that issued it before the CD matures. A callable CD usually pays a higher interest rate than a typical CD with the same maturity date, but you risk it being called back by the financial institution that issued it. If interest rates go down, the financial institution may call the CD since it’s paying you more than the going rate of interest. If that happens, you will have little choice but to invest your money in a different CD that is likely to pay a lower rate of interest. For more information, see http://www.sec.gov/investor/pubs/certific.htm.
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