In the Money: Savings Accounts
Did you know that most Americans do not have enough money saved up to cover a $500 emergency expense?
What is a savings account?
A savings account is an account where you can store cash while earning interest on the money. These accounts are federally insured, which means that up to $250,000 of the money in the account would be protected from loss if the bank were to fail.
Why you need a savings account?
Using a savings account creates a cash buffer between your everyday spending money that is kept in a checking account. Savings accounts can help your money grow! Lending the bank money enables it to turn around and offer loans and other services to other customers, so the bank pays you a little interest in return.
What about the interest rates?
The interest rates that you receive on the money can be optimized by choosing to place your cash into an online bank and more specifically a high-yield savings account. You can find higher rates with online banks because they do not have to support expensive brick-and-mortar branches, enabling them to offer competitive annual percentage yields. These online accounts tend to have low initial deposits and typically do not charge monthly maintenance fees. Using an online bank for your savings account also makes your money a little inaccessible. Meaning you can not use your debit card to take the money out. You would have to initiate an online transfer to your checking account which can take up to 3 business days, which in turn promotes saving for you! Keeping money separate from your checking accounts can ensure that it is there when you need it, like in the case of a financial emergency.
You can check out the following online banks and rate comparing websites as a starting point:
When you need to make a withdrawal…
Federal law limits the number of transfers or withdrawals from a savings account to six per month. You can make more than 6 withdrawals a month but they will typically result in a fee. However, continue to break the six transaction per month rule with the bank and they may change your savings account into a checking account.
How much to keep in your saving account:
I think this is dependent on your financial situation. For myself, I keep a $1000 in my brick-and-mortar bank and 3-6 months worth of living expenses in my high-yield (online only) savings account. I keep $1000 in my brick-and-mortar account because that would be about the cost of my most expensive financial emergency and I also want to limit the amount of interest I lose by keeping it there. Moreover, make sure you are also looking towards the future by investing in your retirement. An individual retirement account (IRA) is a great next step for those with sufficient savings. I’ll have another post soon about IRAs and the differences between traditional and Roth as well as 401K plans (traditional and Roth).
How to get your savings account jump started:
Automate your savings so that a set amount of money is routed directly into your savings account each week, bi-weekly or whenever you get paid. You are essentially making contributing to your savings account a bill. You can also try naming the account “Emergency Savings” so that you are reminded why the money is there and why you should keep it there.
Disclaimer: this is intended for informational purposes only and should not be construed as personalized investment, legal or financial advice. Please consult your investment, legal and financial professional(s) regarding your unique situation.