Saving money is basically setting aside a percentage of current income now to create financial coverage or surplus to use in the future.
Cash accumulation methods come in many different forms. Additionally, there are various reasons why people choose to save. However, your method of saving should be based on what you plan to do with the money in the final analysis.
1. Petty Cash Savings Accounts. When you’re saving just for one big item or for a minimum period of time, or to build up funds for emergency surplus, a passbook savings account is the best method. You need to get rid of the bloated items that are stealing your cash, so that you can save at least $1000 in what I call the Rainy Day or Lean Fund. The reason you want to put this in the bank is because it’s basically liquid. You can get it very quickly without going through much trouble.
This type of account is only good for short-term savings. You have flexibility with that. You can deposit and withdraw money from your account and earn interest, based on your average daily balance. However, the interest earned will be very low because it is not a vehicle for wealth accumulation.
If you make a mistake and use more money than is currently deposited in your account, the bank will charge you an NSF fee of up to $40 per occurrence. The bank will sometimes forgive your mistake and return this fee if requested. However, they will not do this for you every month.
2. Current accounts that generate interest. The best aspect of having this type of account is the ease of use it offers. You can make daily business transactions through this type of account and earn a little interest at the same time. That’s a double. Generally, these types of accounts come with a host of other perks, such as checking, online bill payment schemes, and Visa and Mastercard-based debit cards.
In order to not be charged a monthly fee to maintain this account, you must typically maintain a daily balance of up to $2,000. In the event that you are negligent with this account and are overdrawn in arrears with the bank, ChekSystems will be notified. A report to ChekSystems will mean you are barred from having a checking account with virtually any US bank or credit union for up to five years or more, depending on the severity of your account abuse.
3. Secured Money Market Accounts (MMA). These accounts are backed by the Federal Deposit Insurance Company and are not as affordable as your general savings account or your regular petty savings account. If you don’t need access to this money as much as your savings account funds, this is the way to go. It offers a higher return on dollars deposited, but you won’t be able to run to the local ATM for a quick withdrawal as easily. You may need to fill out the paperwork and send it to the company to cash in shares or write one of the limited checks they give you when you first set up this account. If you can allow these funds to stay put without regular withdrawals, then an MMA is for you.
If you have a higher balance on deposit in this type of account, it means the account will accrue a higher interest rate. However, don’t go to the bank to get a money market account. They typically offer considerably less than money market accounts offered by insurance companies or other investment companies.
4. “CDs” or Certificates of Deposit. This saving place is attached to a measure that requires a specific amount of time. You deposit your money in the bank for 30 days up to 5 years and the bank gives you paper that will expire or be redeemable on a specific date. If you cash in your cd early, you may lose money and may also be fined. The general rule of thumb is that the longer you let it grow, the bigger your pot will be.
Keep in mind that insurance companies generally offer better interest rates compared to banks, so before you invest, shop around for rates first! However, you should avoid saving your money on a life insurance product. It’s a good idea to keep your savings and life insurance coverage separate. Otherwise, you’ll pay higher amounts for your insurance and your money will grow with little or no return for up to three years initially and over the life of the account compared to other investment alternatives.
Remember, the savings or investment vehicle you choose to use should be based on your overall financial goal. Diversification is not just making sure you don’t put all your eggs in one basket. It also means you need to consider whether you can afford the risk of losing your entire investment.
