KJ: Each person may have a different opinion on what it means to actually save, but the main reason someone would save is not to just set money aside indefinitely…you save in order to spend the money at a later date. That saving could be for personally meaningful goals such as a home or auto purchase, vacation, or retirement or it could be for the less exciting unexpected circumstances such as a sudden job loss, health concern, or accident. Essentially, you are foregoing consumption today, so that you can enjoy later.
There are lots of different methods to save, but let’s touch on some of the main ways someone can begin setting money aside (if you are unfamiliar with any terms, Investopedia.com has some great summaries, so I have cited some of these for further reference):
Traditional Savings Accounts
Traditional savings accounts can be found at a bank, credit union, or other financial institution.
Depending on whether the institution is an FDIC (Federal Deposit Insurance Corporation) member bank, you may have some protection and insurance coverage on the funds deposited at the institution. If it’s a Credit Union, they may have some coverage similar to the FDIC called the NCUA (National Credit Union Administration). These traditional savings accounts usually offer the lowest interest rates, but they can be a good place to set aside for your emergency fund.
Money market fund
Money market accounts can be opened at a bank, credit union, or other financial institution including many online-only banks (Ally, ING Direct). While interest rates are VERY low right now with these accounts often paying significantly less than 1%, they can be a good way to get some additional interest above your savings account. While exposed to some investment risk for loss of value (quite rare), money market funds operate with a mandate to try and keep the account value $1 for $1 and are often a good complement to your core emergency fund or other short-term goals.
Certificates of Deposit (CDs)
Certificates of Deposit have more restrictions on how you can access the funds (often limited to holding the CD to maturity in order to avoid penalties), but they can provide a way to set aside money with a specific deadline in mind (vacation, upcoming college tuition in six months, etc.). CDs often have maturities ranging between 30 days or 5+ years, so there are a lot of options to tailor them to your specific objectives. CDs can also be good tools to stagger your emergency fund since not all funds would be needed on day one (or month one for that matter) while getting a yield higher than the previously mentioned account types.
Investment and Brokerage Accounts
When I refer to a brokerage account, I often refer to them as simply an ‘investment account’ to specify excess savings or savings with a long-term focus. You can access many different types of investment strategies such as mutual funds, stocks, bonds, etc…more to come on these topics later. You may feel inclined to manage the account yourself and research the investment options, or if you are able to, you can hire an investment manager to invest the funds on your behalf. Examples (in no particular order or preference) are brokerage accounts at: TD Ameritrade, Schwab, Fidelity, eTrade, Scottrade, etc. A brokerage account can be good for those longer-term goals (four years or more away) whether that’s retirement, children’s education, etc.
Retirement savings can come in the form of an IRA (Traditional or Roth), 401(k), 403(b), 457, or even a regular savings or investment account. Check out our 401(k) post for more information. With retirement money, you often get a tax-advantaged way of accumulating savings to be used for your living expenses when you no longer have that regular (some jobs more regular than others…) paycheck.
Health savings via a Health Savings Account (HSA) or Flexible Spending Account (FSA). Health savings accounts can be a great way to sock away money to help with unexpected (or even expected) bills while at the same time minimizing taxes! Please see also our HSA post with more details.
Then there is saving through building up equity in your home. By paying additional principal to your mortgage each month (or by simply making the mortgage payment) you might be able to build up equity in your home that you could later access once you sell the home. This type of savings is a much less accessible method since it is contingent upon selling your home, refinancing, or tapping into your equity at a bank or other financial institution through a loan, and the costs associated with this strategy for any near-term needs can be very costly. This accumulated “savings” is definitely not something to plan on accessing in a time of need.
Money Not Spent
Last (but not least) is merely ‘savings’ in the context of money not spent. Whether that’s through a coupon or discount, you might be saving what you would have otherwise spent!
We utilize most of the account types above based on our goals and time horizons for accomplishing each goal. While it can be a lot of accounts to keep track of and monitor, if you use programs like Quicken or Mint.com, then it makes staying on top of your finances a whole lot easier!
AJ: Feeling overwhelmed? Would you be feeling even more overwhelmed if a large expense suddenly came up and you realized that even though you’ve saved diligently, you’ve put all of your savings into accounts you can’t access? This list is a great reason to solicit guidance from a financial professional, someone who can make recommendations about the mix of accounts and investments that are best for you and your goals and ensures that you have both balance and growth potential in your accounts. Having so many options makes it difficult to know what will result in the best choice in the long-run, but holding the right kinds of accounts can truly make a difference in your financial future.
Knowing the methods of how to save and the account options available is half the battle to crafting your personal savings plan.
What types of accounts do you currently use?
Would you enjoy more information on an account type mentioned above?
Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.