Savings Account Basics for the Novice Saver | brokeGIRLrich
Spending money is fun, but saving money is smart.
No you can’t take it with you once you leave, but I’m sure we’ve all had at least one happenstance in our lives in which having a lump sum of cash tucked away could have done some good. Whether you’re financially well off or you’re struggling to make ends meet, putting your money into a savings account is a surefire way to watch your money grow without having to lift a finger.
If you’ve done any research on savings accounts you probably came across many different options. The idea behind figuring out which account would work best for you would be to determine the reason you’re saving, how much you have to save, how long you intend to save, and of course the pros and cons of opening each type of account.
To get you started, here are a few of the most common savings accounts:
Regular Savings Accounts
If you have a checking account then you were probably offered the opportunity to open a savings account as well.
Most banks offer regular savings accounts to their customers. These accounts differ from checking accounts in that you don’t have the ability to write checks, you typically have to keep a higher minimum balance, they collect interest, and you may be required to deposit more to open the account. These accounts can be opened for any reason from wanting to have an emergency savings to saving for a much needed trip.
Pros
Regular savings accounts are pretty easy to open. They can be linked to your checking account and bank card so that you have easy access to it whenever you need it. There are usually no penalties for withdrawing from this account when you need to, and the minimum deposit amounts are pretty low compared to other forms of savings accounts.
Cons
The downside to a regular savings account would likely be the small interest rate. Typically it’s about 0.1% which is a very small percentage. If you really want your money to grow and work for you, then you may want to consider opening an account where you will yield more interest.
Certificate of Deposit (CD)
A certificate of deposit, often referred to as a CD is best described as a timed savings account. In general, savers would provide the bank with a certain amount of money with the agreement that it will be held in an account for a certain period of time. In exchange, the bank offers the saver a predetermined amount of interest on the account. This would be an ideal savings account for someone who is looking to save for something long term and to receive a reasonable interest rate. BankingSense gives more information on the best CD rates currently being advertised, noting that “while CD rates have been lower than in years past, you can still find a decent interest rate at several financial institutions.”
Pros
The benefits of opening a CD account are quite obvious – interest. If you’re looking to watch your money grow over the course of the next few years then you’d probably get the most benefit from a CD account. The interest rates are locked in so even if the national interest rate averages go down, you’re still protected as you’re locked into a term.
Cons
Some of the downsides to opening a CD account would be the associated penalties that come with it. Should you for whatever reason decide that you need to withdraw the funds there are pretty harsh penalties that will be accrued. Not only may you have to pay fines when filing taxes but some banking institutions also stipulate a fine.
IRA Accounts
An IRA is a form of savings account that you can open if you’re looking to save towards retirement. Separate from any 401K or pension you may have through your employer, an IRA account is an interest bearing account that has the advantage of tax free growth or tax deferred basis which means there are no tax requirements on the account unless you withdraw from the account prior to your retirement.
Pros
The benefits to opening a retirement account of course are the ability to save towards your future. You also have the advantage of tax free or tax deferred options which can help you save each year.
Cons
The only downside to opening an IRA account would be if you intend to withdraw the funds prior to retirement. This can incur a lot of fees and penalties not only from the government but from the banking institution as well.
If you’re new to saving then you’re going to want to brush up on your banking terms so that you can make the most informed decision on which account would work best for you.
Traditional savings accounts, CDs, and IRAs are all beneficial in that they can all help you to grow your money without having to do anything more then make a deposit. However, knowing the penalties and fees associated with each of these accounts will be important so that you can properly manage your finances. Hopefully, this has given you something to think about as you start your journey to saving and watching your money multiply in just a few years.
Don’t forget that a Roth will let you withdraw your contributions penalty free (not that you EVER should). Not tax deductible, but a lot of time the numbers work out because you’re not paying tax on the profits the IRA generates.
We’re going to start putting my husband’s disability payments into an account starting next year, since we’re in the middle of an appeal and we might have to pay it all back. We’ve been told it could be as long as 18 months for the step AFTER the one we’re currently waiting on. So I’m tempted to put it in some CD ladders and let it make us a little money while we wait.
Abigail @ipickuppennies recently posted…The unique gift for the geek in your life
The CD ladders make sense to me – good luck with the appeal!
I think savings accounts and CD’s are great for kids to learn the basics. You can’t get wealthy and remain wealthy while skipping the basics. Once they learn to save, then they should have some money to invest. Man, my daughter is going to be so stinking wealthy learning from all the financial things I wish I had done just a little bit earlier in life. You won’t get rich from saving, but it does give you the money to invest which will make you rich.
Lance @ HealthyWealthyIncome recently posted…Extreme Saving: How to Save Half of Your Money
Hey,but how exactly does a regular savings account work, and what do you need to watch out for? Thank you.
ritesh45 recently posted…Riding Essentials Starting at Rs.499 On Flipkart
A regular savings account is essentially a holding place for your money that provides you with a very small interest rate. The money is also insured up to a certain (rather large) amount by the government, so if anything ever happened to that bank, your money would still be safe.
Things to watch out for are to make sure the bank is FDIC insured (that’s the insurance I just mentioned) and up to what amount. You also want to look around to make sure you get the best interest rate you can find. Often, though not always, credit unions have better savings account options compared to traditional banks.
Too bad savings accounts don’t really pay any interest now.
Tre recently posted…In Flanders Fields
True, but they’re still very useful for short term goals and emergency savings.
This is a great post detailing out the different types of savings accounts, a lot of helpful information. Thank you for sharing!