When it comes to managing your finances, sometimes it’s important to get back to basics. What is a savings account? Which type of account is best for you? And what else do you need to know when it comes to saving money? Read on for a closer look at the world of saving accounts and saving strategies, to see what options are available and where you might consider putting your money.
Do I Need a Savings Account?
First things first: Do you need a savings account? In almost all cases, the answer is a resounding yes. A savings account can help your money grow, as keeping it in a savings account makes funds less accessible than if they were saved as cash or placed into a checking account. Savings accounts also pay you interest on your money, and while this interest may be relatively small, it’s still a great incentive to get an account.
Are All Savings Accounts the Same?
No. There are a few different kinds of savings accounts, and it’s important to understand these differences so that you can choose the right account for you and your unique financial situation. A basic savings account lets you deposit money, earn interest, and make a withdrawal if you need to access your money. Do keep in mind that most savings accounts limit how often you can withdraw, usually to six times per month.
A money market savings account helps you earn more interest on higher balances, while still maintaining easy access to your funds. Money market accounts are intended for medium-to-long range savings, and usually require a larger minimum balance of funds. This is often a good place to put your emergency savings, so that you can keep funds at-the-ready in case of a crisis, while still earning more interest than with a traditional savings account.
What About Long Term Savings?
If you’re saving up money toward a long term goal like buying a home or retirement, you might consider putting your funds in a savings account that gets you even more benefits. A Certificate of Deposit, or CD, will hold your money for a certain amount of time during which you can’t access it. The benefit to this mode of savings is that interest rates tend to be higher than with a traditional savings or money market account – making CDs a good option if you don’t need your funds for a set period.
An Individual Retirement Account (IRA) is another longer-term strategy for savings. As you may have guessed by the name of the account, an IRA is intended to hold your money until retirement, so in order to get maximum benefits you’ll need to keep your money in the account until you retire. Benefits include unique tax incentives, like compounded interest that grows tax deferred.
What If I’m Saving for a Specific Purpose?
When you have a specific savings goal in mind, it’s often possible to find a type of account that will support you in achieving this. The 529 plan, for example, is a college savings account that offers tax advantages if you’re saving up for higher education. Terms may vary depending on your state, but in general, saving with a 529 plan is a great way to earmark money for school and grow your savings faster.
Concerns around healthcare costs might also be a reason to start a savings account. In this case, consider a Health Savings Account (HSA), which can be set up by you as an individual or your employer. Contributions to an HSA are tax deductible, and distributions from the account are not taxed as long as they are used for medical or dental expenses, or paid out after you turn 65.
I’m Finding It Tough to Save – Any Tips?
Once you’ve found the right savings account for you, it’s time to polish up on your saving skills! Saving money means shifting around your spending priorities, so that you can afford to set aside funds while still maintaining your necessary payments and enjoying a comfortable lifestyle for you and your family. The first step is doing a close evaluation of what money is coming in and going out every month. That will help you to create a plan, see what you can cut, and eliminate common budget leaks like payments for subscriptions you no longer use.
As circumstances change, you may find that your savings goals and strategy need to shift as well. With a strong baseline understanding of what accounts are available, you’ll be more equipped to make the right savings decisions. Always remember to consider your timeline, compare and contrast options in terms of rate of return, fees, tax benefits and how easy it is to access your money; and finally, don’t forget to give yourself a pat on the back. Saving money isn’t always easy, so congratulations on taking another step in your savings journey!