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During the budget posts, we talked about having a “Total to Me” line that is a category where you are essentially paying yourself each month. We talked about the fact that you are more likely to not complain if you do not pay yourself whereas your debtors will complain until you pay them, so it is important for you to pay yourself. You can put this money into a savings account or you can choose to put them into an investment account. There are many options for you to choose from, so let’s talk about them. The purpose of this post is to talk about the different types of savings account products at a high level so that you can get a better understanding and hopefully increase your confidence to work with a financial professional. If you need advice on saving money, please talk to a financial professional, such as a financial advisor or financial planner.
First, let’s talk about a regular savings account. Just about every bank and credit union offers an interest-bearing savings account. These accounts are considered highly liquid accounts, which means you can access the cash quickly and easily with little to no fees for withdrawals. Some places offer high paying interest accounts. These high paying interest accounts are typically from online banks, such as Ally Financial. Savings accounts are not usually a long-term investment, but they can be if that fits your personal situation. The ability to access funds quickly kind of offsets the ability to earn interest income on your money in the account. This product will not get you rich quickly, but it will allow you to feel productive as you progress in your financial education. Mindset is everything with personal finance and opening a savings account can be a great step to keep your mindset positive.
Next, another type of savings account is a Money Market Account (MMA or MMDA – where the D in MMDA stands for deposit). These accounts are similar to your regular savings accounts, but you might see interest payouts being offered on a tiered balance system. A bank might offer x% interest for balances less than $1,000, y% for balances between $1,000 and $9,999, etc.). These accounts are convenient because they might offer debit card privileges, but the point of opening a savings account is to save the money, not just use it as a regular debit card. Additionally, these accounts might come with fees if you decide to withdraw a large amount or close the account. Be sure to check with your banker about any potential fees on these types of accounts before opening one.
Finally, we have Certificates of Deposits (CDs or CoDs) accounts. CD accounts are term deposit accounts, which means that a bank will keep your money in the account for x months or years and pay you an interest rate on that balance. The terms on these accounts can last anywhere from three months to five years. You are compensated differently based on the term or the CD product. For example, a three year CD account might offer a higher interest rate than a six month CD account. If you attempt to access your funds before the term ends, you might be charged a fee from the bank or credit union. It is possible that your bank or credit union can waive a fee, so always ask if that can be done to accomodate an emergency.
Notice that banks and credit unions will typically pay a higher interest rate on accounts that are on a term. This is a trade off for your money to sit with their institution. That should be taken into consideration when you are looking for a product to put your money in. A bank thrives on your deposits because they are allowed to take a percentage of their total deposits to lend out as loans to other people. A banks net interest income is the difference between the interest earned on their loans and the interest paid on their deposit accounts. Therefore, it would follow that you are not likely to earn much more in your savings account than the current interest rates on loans because that would essentially be a bank saying that they would like to lose income, which does not make sense. It might be possible though. Always shop around.
Credit unions, for example, are considered non-profits and therefore they might offer better rates on their savings products. The point is, always shop around. Even if you are 100% certain that you will use the bank or credit union down the street, it does not hurt to shop around. If you find a better rate at another institution and show the credit union or bank down the street what their competition is doing, that bank or credit union might end up introducing a product to stay relevant in the market.
Since we have covered the savings accounts today, I will talk about some ideas for you to save your money tomorrow. We will talk about the emergency fund and how that will work and then we will travel down the path of learning about investments. Should be a fun and exciting few days.
If you have any questions or comments, feel free to leave them down below or contact us.
Disclaimer: I am not a financial advisor. The content on knowxchange.com or “this site” are for educational purposes only and merely cite my own personal opinions and experiences. In order to make the best financial decision that suits your own needs, you must conduct your own research and seek the advice of a licensed financial advisor if necessary. Know that all investments involve some form of risk and there is no guarantee that you will be successful in making, saving, or investing money; nor is there any guarantee that you won’t experience any loss when investing. Always remember to make smart decisions and do your own research!