savings account – Ace Academy

Are you one of the recipients of the most recent round of stimulus money? Or maybe you just came into a small inheritance or windfall of cash. What should you do with this money? If you have credit card debt, pay back your debt, and then stop using your credit cards! If you continue to buy things and rack up interest, you’ll be paying that debt long after the stimulus checks stop. If you owe money, rent for instance, then now is the time to pay it back. Basically if you owe money, now is the time to give it back.

HOWEVER. Rather than using 100% of this extra cash to pay off debt, save 50% towards your emergency fund. Why?? Because if you have debt, chances are, you did not have enough in your emergency fund to begin with. What would happen if another big expense arises? That’s right, it’s back to debt. If 50% covers all your debts, then great! You should still cut up that credit card. If not, at least you can make a dent in the amount owed and use the rest to protect yourself from future unforeseen expenses.

This brings us to the topic of the month: Savings. Let’s say you don’t have debt, besides a mortgage, which bears so little interest that it wouldn’t make sense to pay extra right now. If your emergency reserves are low, then saving money would make sense. Before the pandemic, we all thought 3 to 6 months of cash was sufficient to cover expenses. Now that people have been unemployed for a year, depending on how stable you feel about your situation, it might make sense to save 9 months or even 1 year in an emergency fund. If you’re in the lucky bunch who is still employed and has sufficient emergency reserves set aside, then you can consider spending half and saving or investing the other half towards a long-term goal.

Most of us don’t like the idea of hanging onto so much cash in an emergency fund. One, it’s tempting to spend. Two, it’s not earning interest. If you recall from past article Piggy Bank vs. Savings Account, always keep 1 to 2 months of expenses in a checking account, and then the rest in a savings account. This will limit ATM or debit card access to the funds by a few days, and allow you to earn some interest on that money.

If you have 6 months or more in emergency cash, then it’s time to look at a higher-interest approach. Keep 2 months’ cash in checking, 2 months’ cash in savings, and the rest in a certificate of deposit, or CD. These are not music playing mirrored discs. No, these are bank products that offer more interest on your cash than savings accounts. CDs are held by the bank for a term, ranging from 1 month to multiple years, and the amount of interest you earn depends on how long and how much is being held. The longer the term or the greater the amount, the more interest you earn. You cannot touch the money during the term of the CD, so choose the term wisely. When it comes to an emergency fund, it’s best to pick 1 to 3 months for a CD term, in case you need the money after depleting 4 months of cash in checking and savings. Being bank products, they are typically FDIC-insured, meaning you can’t lose money, but it’s always good to double-check with your financial institution.

For those with 1 year of emergency funds or more, you can use multiple CDs, so that some of the money is available sooner and some is available later. If you want to employ this strategy, you would definitely want to discuss with a financial advisor.

With the financial world being unpredictable, especially in a pandemic, having some savings helps with peace of mind no matter what may happen. And peace of mind is a much better gift than any you can buy.

As a result of the financial crisis caused by a global pandemic, people are saving more than ever before. According to the U.S. Bureau of Economic Analysis, in the span of one month between March and April 2020, Americans went from saving 12.7% to 33% of their income! That raises an important question: Where should you save that money?

The natural tendency is to stash your cash, like under a mattress or in the sofa, right? In that case, you better remember where you stashed it. When I was younger, I hid a $20 dollar bill in my desk and completely forgot where I hid it, only to discover it a decade later. If you can remember where you put your money, you might be tempted to spend it. Doesn’t that already happen with money in your wallet?

The better choice is to use a savings account. Here’s why. Your money is out of sight, out of mind. Unlike storing money within reach in your house, putting money elsewhere discourages spending it. The good news is that if you need cash, savings accounts offer liquidity, meaning they provide access to your money without costing a fortune in fees or taking forever.

The most important reason to store your money in a savings account: Interest. This is the key difference between keeping your money in a piggy bank or in a checking account, neither of which earns any interest. Banks typically offer interest on savings accounts as an annual percentage yield, or APY. For instance, 2% APY means you earn $2 dollars when you place $100 in that savings account all year long. If you don’t touch that savings for another year, you will earn a little more next year because the APY is calculated on $102 vs. $100 originally placed in the account.

Behind the scenes, the reason banks can pay interest is that they earn interest themselves through lending money. By placing your money in a savings account, you are providing additional funds that the bank can use for lending, with a promise to return your money when you need it back. Trusting someone else with your money is not easy, but choosing an FDIC-insured bank will protect your savings account from any loss up to a certain limit (currently $250,000), if the bank should ever fail.

Choosing the right savings account will depend on your own preferences and comfort. Interest rate may play a factor as well, since some accounts trade certain conveniences or features for a higher interest rate. Do your research beforehand. Inquire with banks you have relationships with, and check out some expert recommendations, like this one from MONEY Magazine.

You may be tempted to put all available cash into a savings account. Keep in mind that withdrawing money is easier from a checking account, which offers checks, a debit card, and the ATM. Plus, the point is to have limited access, keeping a savings account sacred for emergencies or earmarked for specific goals. Therefore, consider opening a savings account after you have set aside 1 to 3 months of cash in your checking account. That way, you can still use cash on a daily basis from your checking account, but have back-up funds waiting in savings.

We all know that saving money is important, but where you save makes a difference. Why let your money sit idle when it could be making money? That’s the power of a savings account!

Homework: What’s the APY on your savings account? If you were to add $500 a year, how much more interest would you earn? What about $1,000 a year?

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Tag: savings account

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