Financial Education Clearinghouse

Savings

Savings

Savings goals and strategies are necessary if you want to plan for your financial future.

Emergency Savings

A good first goal is to set up a savings account for emergencies. Ideally, your emergency fund would have enough money to pay your living expenses for 3 to 6 months. Your emergency savings should be able to cover in the event of unexpected expenses such as job loss, vehicle repairs, etc.

Types of Savings Accounts

Traditional Savings – Basic savings accounts can be opened at most financial institutions and with just a little bit of money. Your account will start earning interest once you have met the minimum balance requirement. Traditional savings accounts are liquid and most allow you to access your money through traditional banking services such as tellers and online accounts. Savings accounts at FDIC insured banks or NCUA insured credit unions are covered up $250,000 in the event the financial institution fails.

Money Market Accounts – Money market accounts typically pay a slightly higher interest rate than traditional savings accounts. The difference between the two is how you access your money. You can write checks from the money market account, but the number of checks you write and the number of times you can take out your money are limited.

Certificates of Deposit (CD) – A certificate of deposit (CD) is an account that you agree to leave your money for a set amount of time. CDs pay higher interest than most traditional savings and money market accounts, but you will pay a penalty if you withdraw your money early.

Savings Bonds – The Federal Government offers several different types of savings bonds that pay different interest rates. When you lend your money to the government, you are guaranteed to receive your money back plus the interest accrued. For more information on savings bonds, visit www.treasurydirect.gov

IRAs – An Individual Retirement Arrangement (IRA) is a personal savings plan that allows you to set aside money for retirement and provides certain tax advantages.

With a Roth IRA, qualified withdrawals are tax free. In essence, the money you put into a Roth IRA has already been taxed.

With a Traditional IRA, the money you put in is tax deductible. In essence, you can reduce your taxable income by contributing money to a traditional IRA.

For more information on IRAs, visit the IRS website at www.irs.gov.

Comparing Accounts

When shopping around for savings account, there are a few things you might want to consider.

  • Liquidity – Do you need easy access to your cash? Some accounts, such as CDs, have penalties if you withdraw early.
  • Deposit Insurance – Check to make sure that your account is insured by the FDIC for banks or NCUA for credit unions.
  • Monthly Fees – Some accounts charge monthly fees if you don’t maintain a certain balance.
  • APY – What’s the annual yield for the savings account with compound interest factored in?
  • Compounding Periods – How often and on what balance is is the compound interest for the account paid upon?