Do You Have a Savings Plan?
The monthly paycheck you get (cha-ching!) is a reflection of your hard work. While setting aside part of your salary may sound important, it can be hard to figure out just where to put your extra dollars (especially when you’d rather use the money to buy an expensive handbag). Read on for a breakdown of savings options.
Savings Account: Perhaps the most basic of savings plans, this is just one step up from tucking coins under your mattress. A savings account does have advantages, however, especially if you’re just starting to build an emergency fund. Most savings accounts let you deposit money at any time, withdraw it at your leisure, and even make transfers online. If you don’t have a savings account already, you can set one up at your local bank.
While your dollars will earn interest in a savings account, keep in mind that the earnings will be minimal. The interest rate is usually quite low, ranging from below 1% to 3%. Once you’ve stored up enough cash for a rainy day, you’re ready to move on to other investing options.
Money Markets: There are actually two types of accounts that fall into this category: money market accounts and money market funds. You can get a money market account through your bank. Interest rates attached to money market accounts are significantly higher than those that come with a basic savings account. Money market accounts are FDIC-insured, meaning if anything happens to the bank, the government will make sure you get your money.
A money market fund is similar to a money market account, except that it is not FDIC-insured. If you’re not sure which choice is better for you, ask a financial adviser about your options. Also, head to Bankrate.com for in-depth coverage on money market accounts and money market funds.
With either option, expect to have certain restrictions on the account. Most include a minimum balance requirement, as well as a limit on how many withdrawals can be made each month. Ask about transaction fees and other charges before signing up.
Certificates of Deposit: Also known as a CD, this option usually includes a higher interest rate than a money market account or fund. With a CD, you invest a specific amount of money for a certain period of time. When the time period, or term, ends, you receive the amount you invested plus the interest you earned. The average term for a CD ranges from three months to five years.
One thing to remember with CDs is that you are not allowed to withdraw the money until the term ends. If you need to take it out beforehand, expect to be charged a steep penalty. To avoid this dilemma, make sure you have other sources of cash you can easily access before you get a CD.
Bonds: From low-risk U.S. Treasury bonds to high-risk corporate bonds, this type of investment comes in a wide variety of forms. When you purchase a bond, you’re really lending someone money. That person, or institution, will return your money, along with the interest you earn, after a certain period of time. If you’re interested in taking your investing to this level, you’ll first want to fully understand the market. Visit Investopedia.com for a complete lesson on bonds. Check in with a financial adviser to discuss your options.
The key to a great savings plan is to start slow. Once you’ve built up a cushion, you can branch out into other areas. You’ll soon have a nice nest egg to fall back on.