Where to Keep Your Savings

So, you’ve set up an automatic savings program and you’re finally building up that emergency fund,
but where should you keep your savings so that it earns the most
interest for you? Luckily, there are many different savings vehicles
available, but not all of them are appropriate for every situation.

Savings Accounts

Most likely, you have already established a savings account at your
local bank or credit union, and you may have this linked up directly to
your primary checking account to make transferring money to savings
easy. A savings account is the most convenient place to save money, but
it might not be putting your money to work.

When using a savings account, it is important to look at the
interest rate. Depending on where you bank and what type of account you
have, you could be earning anywhere from less than 1% up to 4% or more.
The problem is that many banks only provide high interest rates for
significant balances over a certain amount. If you find you are only
earning 0.65%, after accounting for inflation, you are actually losing
purchasing power.

The best thing about savings accounts is that they are completely
liquid. This means you can access your money on very short notice. You
may be able to go online and transfer money from savings to checking,
withdraw from an ATM, or stop into your local branch.

Money Markets

In addition to your basic savings account, you may encounter another
savings vehicle called a money market. There are actually two different
kinds of money market accounts: money market bank accounts and money
market mutual funds.

Money market accounts offered by your bank work almost the same as
far as the consumer is concerned, but since the money held in a money
market account is invested a bit differently, there are usually more
restrictions on the account. Typical restrictions are usually higher
balance requirements and a limited number of withdrawals per month or
quarter.

Money market mutual funds are not issued by a bank, but are offered
by investment companies. You would need to have an existing brokerage
account or establish a new account with the fund company directly to
take part in a money market mutual fund. These funds invest in various
short-term investments collectively in order to produce an attractive
interest rate. Unlike a money market account at your bank, these are
not FDIC insured.

Although money market accounts generally have higher interest rates
than a savings account, the restrictions on the number of withdrawals
per month or the requirement of opening a separate account makes these
funds slightly less liquid.

Certificates of Deposit

A certificate of deposit, otherwise known as a CD, is another place
to save money that is routinely offered by your bank. A CD is a time
deposit, which means that the money you place on deposit must remain
there for a specified amount of time before you can withdraw it.

You can purchase a CD with a variety of time frames as short as one
month to upwards of many years or more. In most cases, the longer you
agree to leave your money on deposit, the more interest the bank will
pay you.

Since you are required to leave your money in the CD for the amount
of time selected, this can make your money less accessible than a
savings or money market account. This can be a good thing, since it
encourages you to leave the money alone, but in an emergency where the
money is needed very quickly, this can be a hindrance. Fortunately, you
can access your money before the CD matures, but the bank will impose a
penalty which could effectively wipe out the interest you have earned.

Savings Bonds

Another possible option for your savings is in savings bonds.
Savings bonds are issued by the U.S. government and are backed by its
full faith and credit. Similar to CDs, savings bonds have a maturity
date set in which the bond reaches the maximum value. In most cases,
this is 20 or 30 years.

Savings bonds are credited interest each month and you can cash in a
savings bond at any time, although doing so prior to maturity may
result in foregoing some interest. You can purchase savings bonds at
most banks or online at Treasury Direct.

Like CDs, you may encounter liquidity issues with savings bonds
since they are purchased separately and you can only receive money from
them through redemption at either a bank or by mail.

What is Right for You?

When it comes to savings, there isn’t a right or wrong answer. It
ultimately depends on your needs. If you are using your savings for
overdraft protection and want to have it available instantly in the
event you need it, a savings account might be the most appropriate. If
you are saving for a large purchase or something predictable a few
months or years down the road, you can probably find better rates with
a CD or possibly a money market fund.

For many people, it comes down to having a mix of multiple savings
vehicles. There will be part of an emergency fund in a savings account
at the bank, possibly some cash in a money market fund in an investment
account, and some CDs or bonds stashed away for longer-term savings.
Whatever the case may be, you want to make sure your money is working
as hard as it can.