Budgeting & Saving
You’ve mastered budgeting and curbed unnecessary spending. It’s time to start your saving journey. Deciding where to save money can be confusing for some and leave you wondering, “where’s the best place to save money?” Fear not. In this article, we’ll breakdown the ins and outs of saving so you can make an informed decision with your money, keeping it secure, allowing it to grow and work for you.
Saving vs. investing
Before we dive in, lets breakdown the fundamental differences between saving and investing. While these terms are often used interchangeably, they differ in terms of risk, accessibility, and longevity.
Saving money, at its core, is the practice of keeping the money you’ve earned safe and readily available when you need it. Investing is attempting to grow your funds over time. Savings accounts are typically insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000, offering a high degree of security. While it’s a safer option for your money, the potential for growth is lower.
Investments carry a degree of risk and are subject to market fluctuations. While stocks and other investment vehicles can yield substantial returns, there is also the possibility of losing some or all of your money if your investment underperforms.
Establishing clear goals
Identifying your financial goals is the cornerstone of an effective savings strategy. Ask yourself the following questions:
- What are your short-term and long-term financial objectives?
- How soon will you need to access your funds and how much will you need?
- Does the account require any minimum deposits, balances, or fees?
- How secure will your money be?
Answering those questions may provide clarity as to which savings methods best align with your goals.
Traditional savings accounts
Traditional bank or credit union savings accounts are the foundation of many savings strategies. These accounts offer a safe haven for your funds, as they are insured by the FDIC up to certain limits. While the interest rates may be modest, these accounts provide ease of access and peace of mind.
When evaluating traditional savings accounts, consider the following factors:
- Annual percentage yield (APY)
This metric indicates the interest your money will earn over a year. - Monthly fees
Look for accounts without monthly service fees that can erode your savings over time. - Accessibility
Find an account that allows access to your funds through ATMs, online transfers, and other digital services.
High-yield savings accounts
If you want higher returns on your savings without sacrificing liquidity, high-yield savings accounts may be the answer. These accounts could offer better interest rates than traditional savings accounts, making them an attractive option for funds you may need to access quickly.
However, be mindful of the following possible drawbacks:
- Minimum deposits or balances
Some high-yield accounts require a certain initial deposit or minimum balance to earn the best interest rate. - Withdrawal limitations
Certain providers limit the number of monthly withdrawals, restricting access to your funds. - Account fees
While many high-yield accounts promote no monthly fees, look for hidden charges that could cut into your returns.
High-yield checking accounts
High-yield checking accounts combine the benefits of a checking account with the earning potential of a savings account for a unique opportunity to maximize your returns while maintaining liquidity. These accounts often provide interest rates comparable to or higher than those of traditional savings accounts.
When evaluating high-yield checking accounts, consider the following factors:
- Debit card and check-writing privileges
These accounts typically come with the convenience of a debit card and the ability to write checks, enhancing your access to your funds. - Unlimited transactions
Unlike savings accounts, high-yield checking accounts generally do not impose restrictions on the number of transactions you can make per month. - Requirements
Some accounts may require you to meet certain criteria, such as maintaining a minimum balance or setting up direct deposits, to earn the best interest rate.
Money market savings accounts
Money market savings accounts strike a balance between the accessibility of a savings account and the earning potential of a money market fund. These accounts pay interest rates that are competitive with high-yield savings and checking accounts, making them an attractive option for those seeking a blend of liquidity and growth.
When considering a money market savings account, keep the following factors in mind:
- Minimum deposits and balances
These accounts often require higher opening deposits and minimum balances, typically ranging from $3,000-$10,000+. - Check-writing privileges
Some money market accounts offer the ability to write a limited number of checks, enhancing your access to your funds. - Account fees
Money market accounts may include maintenance fees or charges associated with the account. These fees can cut into your earnings over time.
Money market mutual funds
While not bank accounts, money market mutual funds offer a low-risk investment opportunity for those seeking to park their money for the short term. These funds invest in a diverse range of low-risk securities, such as cash, municipal bonds, bank debt securities, and U.S. Treasury bills, notes, and bonds.
When evaluating money market mutual funds, consider the following factors:
- Returns
The returns on these funds tend to be similar to those of high-yield savings accounts, but they are not guaranteed. - Fees and minimum deposits
Some funds advertise no fees or minimum deposits, while others may require substantial initial investments and charge fees based on the size of your account. - Risk
While considered a safe investment option, money market funds are not insured by the FDIC, and there is a small risk of losing principal.
Certificates of Deposit (CDs)
CDs offer a unique opportunity to earn a fixed interest rate on your savings for a predetermined period. By depositing your funds with a bank for a set duration, such as 3 months, 6 months, or a year, you can lock in a guaranteed rate of return.
When considering CDs, keep the following factors in mind:
- Interest rates
CDs typically offer higher interest rates than traditional savings accounts, with longer-term CDs often yielding higher rates. - Early withdrawal penalties
Withdrawing your funds before the CD’s maturity date can result in hefty penalties. - CD laddering
Building a CD “ladder” by investing in CDs with staggered maturity dates may help to maintain regular access to funds while avoiding early withdrawal penalties.
Savings and treasury bonds
Savings bonds and treasury bonds, issued by the U.S. government, are considered among the safest investment options available. These bonds are backed by the full faith and credit of the government, making them an attractive choice for those seeking a low-risk haven for their savings.
When evaluating savings and treasury bonds, consider the following factors:
- Interest rates
Savings bonds, such as Series I and Series EE bonds, offer varying interest rates. Some guarantee to double your investment if held for a specific period. - Maturity dates
Treasury bonds, notes, and bills have different maturity dates, ranging from a few weeks to several decades, allowing you to choose an investment strategy that aligns with your financial goals. - Accessibility
While savings bonds can be redeemed after a certain holding period, treasury bonds offer greater liquidity, as they can be bought and sold on the secondary market.
Diversify your portfolio with corporate and municipal bonds
Bonds, both corporate and municipal, offer a low-risk debt investment option with varying degrees of returns and maturity periods. By lending your money to companies or the government, you’ll get regular interest payments and the return of your principal upon maturity.
When considering bonds, keep the following factors in mind:
- Risk and credit ratings
Evaluate the credit rating and financial stability of the bond issuer to assess the risk associated with your investment. - Interest rates and maturity periods
Bonds offer a range of interest rates and maturity periods, allowing you to align your investment with your financial goals and risk tolerance. - Early withdrawal penalties and commissions
Be mindful of any penalties or commissions associated with early withdrawal or the purchase of bonds, as these can impact your overall returns.
Health Savings Accounts (HSAs)
HSAs offer a unique opportunity to save for qualified medical expenses and save on your taxes. These accounts are designed to be used in conjunction with high-deductible health insurance plans, allowing you to contribute pre-tax dollars directly from your paycheck.
HSAs offer several benefits, including:
- Tax-free growth
The money in your HSA grows tax-free, and withdrawals for qualified medical expenses are also tax-free. - Rollover and portability
Unused funds in your HSA can be rolled over from year to year, and you can take the account with you if you change employers. - Flexibility in retirement
After age 65, you can use your HSA funds for any purpose, with withdrawals treated as taxable income (unless used for qualified medical expenses).
When considering an HSA, be mindful of the annual contribution limits and ensure that you understand the eligibility requirements for making tax-free withdrawals.
Conclusion
By carefully evaluating your financial goals, risk tolerance, and liquidity needs, you can strategically allocate your savings across various accounts to maximize returns while maintaining security and accessibility. Remember, a diversified savings portfolio is key to achieving long-term financial success and peace of mind.
This article is for educational purposes only and is not intended to provide financial, tax or legal advice. You should consult a professional for specific advice. Best Egg is not responsible for the information contained in third-party sites cited or hyperlinked in this article. Best Egg is not responsible for, and does not provide or endorse third party products, services or other third-party content.
