So, you’ve set up an automatic savings program and you’re finally building up that emergency fund, but where should you keep your savings so that it earns the most interest for you? Luckily, there are many different savings vehicles available, but not all of them are appropriate for every situation.
When using a savings account, it is important to look at the interest rate. Depending on where you bank and what type of account you have, you could be earning anywhere from less than 1% up to 4% or more. The problem is that many banks only provide high interest rates for significant balances over a certain amount. If you find you are only earning 0.65%, after accounting for inflation, you are actually losing purchasing power.
The best thing about savings accounts is that they are completely liquid. This means you can access your money on very short notice. You may be able to go online and transfer money from savings to checking, withdraw from an ATM, or stop into your local branch.
In addition to your basic savings account, you may encounter another savings vehicle called a money market. There are actually two different kinds of money market accounts: money market bank accounts and money market mutual funds.
Money market accounts offered by your bank work almost the same as far as the consumer is concerned, but since the money held in a money market account is invested a bit differently, there are usually more restrictions on the account. Typical restrictions are usually higher balance requirements and a limited number of withdrawals per month or quarter.
Money market mutual funds are not issued by a bank, but are offered by investment companies. You would need to have an existing brokerage account or establish a new account with the fund company directly to take part in a money market mutual fund. These funds invest in various short-term investments collectively in order to produce an attractive interest rate. Unlike a money market account at your bank, these are not FDIC insured.
Although money market accounts generally have higher interest rates than a savings account, the restrictions on the number of withdrawals per month or the requirement of opening a separate account makes these funds slightly less liquid.
You can purchase a CD with a variety of time frames as short as one month to upwards of many years or more. In most cases, the longer you agree to leave your money on deposit, the more interest the bank will pay you.
Since you are required to leave your money in the CD for the amount of time selected, this can make your money less accessible than a savings or money market account. This can be a good thing, since it encourages you to leave the money alone, but in an emergency where the money is needed very quickly, this can be a hindrance. Fortunately, you can access your money before the CD matures, but the bank will impose a penalty which could effectively wipe out the interest you have earned.
Savings bonds are credited interest each month and you can cash in a savings bond at any time, although doing so prior to maturity may result in foregoing some interest. You can purchase savings bonds at most banks or online at Treasury Direct.
Like CDs, you may encounter liquidity issues with savings bonds since they are purchased separately and you can only receive money from them through redemption at either a bank or by mail.
