Savings and Savings Accounts 101

No matter what your financial status in life, virtually everyone needs to have a savings account. But first, do you have a plan for those savings? A prescription before a diagnosis results in malpractice, so first decide WHY you’re saving, what your goals may be, and how much you can afford to save (get that budget in force!).

What are you saving for?

Generally, the money you put into your savings account should be for a short term goal (less than 5-10 years) or for an emergency fund. Money you’re saving for things that stretch out longer than 5-10 years should ideally be invested (an entirely different topic).

What are some possible short-term savings goals?

• An engagement ring
• A vacation
• A vehicle
• New appliances
• Back to school clothing
• Christmas gifts

It’s also acceptable to have a savings goal to accumulate a certain amount in your savings account for transfer to an investment vehicle.

How to Set Up a Savings Plan

A savings plan is breakdown of how much of your budget surplus you need to put into savings each month to achieve your savings goals. If your budget leaves you with a $300monthly surplus and a $3,000 engagement ring is your sole savings goal, you should plan to put $300 in your savings each month for 10 months. If you’re saving for several different goals at once, your plan should subdivide your monthly surplus based on the amount and urgency of each savings goal.

Savings Accounts

The easiest place to keep money that you intend to save is in a savings account. They all work roughly the same way: you deposit money, it earns interest, and you withdraw it when you need it. These accounts are virtually risk-free since they’re insured (currently up to $250,000) by the Federal Deposit Insurance Corporation (FDIC), one of the U.S. government agencies established to protect savers from bank failure.

How to Compare Savings Accounts

Though all savings accounts serve the same basic function, they differ in terms of yield, fees, and withdrawal policies.

• Yield: An account’s yield refers to the amount of interest that the bank pays on money deposited in the account. Yield is expressed as an annual percentage. For instance, a savings account with a $1,000 balance and a yield of 4% will earn $40 in interest every year depending on when interest is computed and added. If two savings accounts are equal in every other way, the account that offers the higher yield is generally the better choice.
• Fees: Most banks have low minimum requirements for savings accounts (usually $50–100) and charge a monthly fee of $10 or so if your account falls below that amount. Some banks may also charge a monthly or annual maintenance fee as well. When shopping for a savings account, look for one that charges no maintenance fees and has a low minimum balance requirement, ideally $500 or less.
• Withdrawal policies: Banks tend to discourage customers from making frequent withdrawals from savings accounts by placing limits on the number of withdrawals that can be made per month. Some banks tout the comparative flexibility of their savings accounts by offering check writing and other features that make their savings accounts function more like checking accounts. If you’d like the freedom to withdraw more often from your savings account, be sure to inquire about withdrawal and check-writing options before you set up an account.

Savings Account Providers

You can set up a savings account at an online bank, a traditional bank, or, a credit union.

• Online banks: Online banks (such as ING Direct) have no branch offices, so you must do all your banking online or by mail. Since online banks have such little overhead, they typically offer the highest yields and the lowest fees. In my experience, their service is spectacular!
• Traditional banks: There are three main types of traditional banks—local, regional, and national. Local and regional banks are based in a particular city or region. They tend to have the most personalized customer service but may offer lower yields than national banks.
• Credit unions: Credit unions are like private banks: to use their services, you first must apply for membership and gain admission. Credit unions tend to offer higher yields than traditional banks, but some also charge monthly or annual membership fees.

Some people feel more comfortable using a traditional bank or a credit union, since they can visit the bank in person with detailed questions or would like to set up another account, such as a checking account. Me? I prefer using an online bank (I use ING Direct)  and they are a great choice if you just need a basic account to park your savings in an account with a comparably high yield. Online banks are also a great choice if you live in a rural area or in a location without retail bank branches.

How to Set Up a Savings Account

Setting up an account at any of these financial institutions typically involves filling out a few basic forms with your personal information, including your Social Security number, and making an initial deposit to establish the account, which often can be as little as $25. And remember, all U.S. based savings accounts are FDIC insured up to $250,000.

The next step: Automate Your Savings

The best way to force yourself to stick to your savings plan is to use an automatic deposit plan. These plans automate the process of depositing money into your account each month. To set up a plan:

• If you work for a company: Contact the payroll department to request that an amount equal to your monthly savings goal be deposited directly from your paycheck into your savings account each month.
• If you’re self-employed: Contact your bank to arrange for an automatic monthly transfer from your checking account to your savings account.

Most likely you’ll adjust quickly to having a lower amount of take-home pay and won’t miss the money that goes straight into your savings account. If you find that you don’t adjust, you can always cancel your automatic deposit plan. If you’d prefer to have a bit more flexibility with the money that you deposit automatically, you can choose to direct the money into a checking account, which typically has no limits on monthly withdrawals.

Photo from Snopes.com. This was part of $207 million seized in a drug raid. It wasn’t kept in an official savings account …

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