These 3 Types of Accounts Can Save the Day

Trying to build an emergency fund, down payment or rainy-day fund? These savings vehicles offer stability and liquidity.

Don Milne Jul 17, 2018

While it is common to hear someone refer to “saving for retirement” or “investing in CDs,” those terms are not exactly accurate. In fact, it’s more accurate to say you are “investing for retirement” and “saving in CDs.”

Moneys used for saving and investing are different. With investing, the goal is to grow your principal above the rate of inflation, so that when you need the money down the road, you have more than you started with.

Investing focuses on taking advantage of the power of compound interest over a long period of time. High annual earnings combined with an investment that last decades can result in a balance far in excess of what you started with. For most people, mutual funds are the easiest investment choice, with a history of significant returns and affordable fees.

Nobody should invest all of their money, though — especially if they need access to it in the short term or can’t afford to lose any principal. This is because although investments usually appreciate in value, they sometimes decrease. It’s no fun if you invest $1,000 and a year later, when you need it, it is worth $800.

Savings Vehicles Offer Stability

If you can’t afford to lose value, then you should consider savings vehicles instead of investments. Not counting hiding money under your mattress (a “Savings for Dummies” move), the main ways to save money are with a savings account, money market account or certificate of deposit.

  • Savings accounts are the most popular and liquid saving option. You can open one for the lowest amount and keep the lowest balance without paying a fee. It also pays the lowest interest rate.
  • Money market savings accounts are the next most popular, but usually require a higher opening and minimum balance. A plus for this kind of account is a higher interest rate and limited check writing access.
  • Certificates of Deposit pay the highest rate, but they also commit the saver to hold the CD until maturity, which can run from one month to five years. The longer the term, the higher the rate. Pull the money out early and you pay an interest penalty.

Which Savings Vehicle is Best?

If you are going to be saving just a few hundred dollars, a standard savings account will do. If you plan to save a few thousand dollars, perhaps for an emergency fund, or for a future large planned purchase, a money market savings account would be a good match. CDs are a good choice if you want to keep inflation from eroding too much of your cash.

In today’s rising interest rate environment, locking yourself into current CD rates may leave you earning less than if you wait to get a CD later. One way to get around this is doing what is called “CD laddering.” Here is an example of how this works using $5,000 as an example, but you can do it with higher amounts, too.

Instead of opening one CD for $5,000, you open five $1,000 CDs with maturities ranging from one year to five years. As each year’s CD matures, you renew it for five years. That gives you the highest current rate and you still get access to 20 percent of your money each year if you need it.

Zions Bank is offering a special promotional rate on a 1-year CD. The CD requires a $1,000 minimum balance to open.

Regardless of which savings choice you make, they all qualify for the standard FDIC insurance coverage of $250,000 per depositor.

Whether you have a savings account, money market account, or CD, having money set aside that is easy to get to is a great thing.

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