Tips On Saving Money – Savings Options

More than likely, you’ve got a savings account set up with your local bank or credit union that is linked to your checking account. This is a convenient way to save because the funds are there for you when needed.

Having the savings account is a necessary first step to save money for an emergency fund. It’s also important should you need quick access to your cash; but it’s not going to have your money working for you because the interest rate earned on these accounts is very low.

These days, unless you have a very high cash balance in your savings account, you’re not going to earn even 1%. So, by keeping all your cash in a savings account earning maybe .50%, you’re not even keeping up with inflation and losing your purchasing power as a result.

So, the biggest advantages of having a savings account is its convenience and liquidity. This means you can access your money quickly when needed. If you need cash, you can run to the bank for a quick withdrawal or use the ATM.

Tips On Saving Money – Money Markets

Another money saving source are money markets. Banks offer money market accounts which we feel don’t do much to help you because, like savings accounts, the interest rate earned is low. Also, you have restrictions on how many withdrawals you can make each month.

Money market mutual funds, however, are a different story. This is basically a mutual fund offered by investment companies such as big players like Fidelity and Vanguard. These funds invest in a pool of short-term investments and pay out an attractive interest rate.

We’ve invested in these funds for several years. However, this savings option depends on how risk averse you are.

Unlike a bank savings, money market account or CD, money market mutual funds are not FDIC insured. FDIC insurance protects you’re cash balances up to $250,000 in the event that a bank or financial institution goes under (ie: files bankruptcy).

Tips On Saving Money – CD’s

Certificates of deposit (CD’s) are another option for parking your savings. Basically, a CD is a time deposit, which means the money you put into a CD should remain there for a specific amount of time before you can withdraw it. A CD’s maturity can range from days to 3 months, 6 months, 1 year, or even up to 5 years.

We like CD’s because you can earn a decent interest rate, they’re usually FDIC insured (verify FDIC insurance with your bank) and you can choose how long to park your money in the CD whether it be 3 months, 6 months, 1 year, etc.

We prefer the shorter terms CD’s because it enables us access to our funds quicker than a longer term CD. Also, the interest rate earned is not substantially higher on a long versus short term CD.

Another benefit of the CD is in an emergency you can still withdraw your money prior to its maturity. You would lose some or all the interest you would have earned on it had you held onto it until maturity. However, you will recover the money (the principal) you put into the CD.

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