Options for Building Your Savings and Your Future
Your savings are more than just a rainy-day fund or a stockpile to kickstart a project. Savings are also a part of your investment and wealth portfolio, and there are a few products that can help you get a good return on that money. The key to setting up secure short-term emergency funding and long-term growth savings? It’s just a matter of understanding different accounts you can use to save and what they do best.
Traditional Savings Accounts
The most accessible and lowest yield choice for saving money and making a little extra with it is a traditional savings account from a bank or credit union. Often there are introductory options that have no fees for basic banking, and even when service fees are associated with an account, they tend to be low. Interest rates are also low, and the yields are based on an average daily balance. Understanding how that balance is calculated and what intervals interest accrues at can help you time your withdrawals strategically, but if you want to earn higher returns, you need to choose slightly less accessible options.
Money Market Accounts
If you have the funds to qualify for a money market, you can usually make significantly higher returns while still enjoying the ability to withdraw cash as needed. Depending on how the account is structured, a drastic withdrawal could put you up against federal transaction limits or account limitations. If you have significantly more than the minimum needed to maintain this kind of account and need to access its funds infrequently, it’s a good way to balance savings and returns.
These products are basically the same thing, with one being the name when you get one from a bank and the other being the credit union version. In each case, the amount of interest offered as a return on the CD certificates will be related to the length of the term and the size of the deposit. Institutions define their own thresholds for interest bumps based on the balance, but having terms from three months to two years is a standard across just about every program.
- 24-month certificates enjoy the best rates at every threshold
- 3-month rates are often marginally more than savings account interest
- Early withdrawal for emergencies can be done, but there are penalties
- Ideal for long-term savings with a goal date for total savings
Typically, certificates of deposit do not allow you to add to the balance once you take them out. You commit a deposit amount, which is then tied up until the end of the term, at which point the dividend is settled and you can choose to withdraw the funds, put them into another account or put them into another CD.
Balancing Your Short and Long-Term Savings
Since the lowest-yield accounts have the easiest withdrawal conditions, your emergency funds should stay in them. The ideal use case for basic savings is one with a goal. Some people choose to make it a certain dollar value, with the rest going to either CDs or money markets. Other people save up a small nest egg and then aspire to keep the accessible portion of savings at a certain percentage of the total across accounts.
Certificates of deposit offer reasonable terms for funds that you may want for a major purchase like a vehicle or home in a few years. That kind of goal and term balances well with retirement savings and a liquid account for emergencies. Once you have your savings strategy set up for the middle and short-term, it’s a good idea to start looking toward retirement savings options.
Most retirement planning accounts are built around securities, whether you manage the investments or allow professionals to set up a plan for you. There are a lot of options out there, and some offer significant tax savings. Once you have some short-term and medium-term savings set up, make sure you research the long-term options you have for retirement savings.