I have saved the best financial topic for last. Saving money is one of my favorite hobbies. It is so much fun watching the amount of interest increase each month. It doesn’t matter if it is a few cents, $1, $100, or more, this is income that I don’t have to work for, just keep my paws off the principle and it grows. You can’t ask more than that. And seeing that balance increase each month (or whenever I want to peek at it) gives me such a feeling of accomplishment and security.
Levels of Savings:
Emergency Savings: Our first goal is to save enough for emergencies that may come up unexpectedly. This is savings to take care of you and your family for unexpected emergencies, such as: if you are laid off from your job, not able to work for some reason, a victim of a natural disaster, or any other like emergency. The goal for this category is 6 months of expenses minimum (1 year preferred). You will be able to figure out this goal by our earlier analysis. This is often an overwhelming amount to think of for most people, so just remember each little bit adds up and gets you closer to the goal.
Short Term Savings: Next we will define Short Term Savings as setting aside funds for something we will need in less than a year. These are needs we know about and are planning for. This could include saving for a new sofa, vacation, or even Christmas gifts. If you can set aside money over time for these items, you will be saving greatly over high interest rate credit cards. It really pays to plan ahead.
Long Term Savings: This will include large items we are saving for which are more than a year in the future. This would include saving for items such as a down payment on your first home, your children’s college education, and your retirement. The more you are able to set aside for these future expenses now the easier it will be in the future. If your company offers a matching 401K, do your best to max it out (at least to ensure you get the highest amount in the match). This is like getting a raise immediately.
Vehicles of Savings:
Savings Account: Along with your local savings account, online savings accounts are a great option for your savings needs. These rates are higher than the national average for standard saving accounts, but at this time still a very low interest rate. You will need to allow about 3 days to transfer money back and forth from the online savings to your checking or local savings accounts, when or if this money is needed. Ensure this is from an FDIC insured bank to reduce risk (see below).
Certificates of Deposit (CD): CDs often have higher interest rates than your typical savings account, since you are tying up your money for a set amount of time (6 months, 1 year, 5 years, etc). Additionally, if you feel the interest rates as a whole are either going up or down you can use this interest rate for a set amount of time for your benefit. Ensure this is obtained from an FDIC insured bank (see below).
Stocks, Bonds, and Mutual Funds: These are investment vehicles that are more risky than the first two I have listed. These are not FDIC insured and there is a possibility that you could lose the principle you invested. Since past performance is not always a reflection of future performance, I would recommend you obtain professional advise on these options. Additionally, this investment is above your emergency and short term savings, since there is a great possibility of loss if it’s needed in the short term.
Federal Deposit Insurance Corporation (FDIC) was developed in 1933 to insure your savings in a FDIC insured bank if it does fail. Your savings will be protected up to the insured amount in this case.
• The FDIC insures all deposits at insured banks, including checking, NOW and savings accounts, money market deposit accounts, and certificates of deposit (CDs), up to the insurance limit.
• The FDIC does not insure the money you invest in stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities, even if you purchased these products from an insured bank.
• The basic insurance amount is $100,000 per depositor per insured bank. Certain retirement accounts, such as Individual Retirement Accounts, are insured up to $250,000 per depositor per insured bank.
In this time of a difficult economy, banks are actually failing. This is something I never thought I’d see in my lifetime. We need to ensure we are aware of the rules and limitations of this insurance, so we are protected. Basically, if you have over $100,000 at any insured bank, consider transferring some of your savings to another insured institution. Also, check to ensure that your bank is FDIC insured. Further details on the FDIC are available at their web site.
If you are in the market for a new Checking Account, Savings Account, CD, Credit Card, Mortgage, etc. the current interest rates and plan comparisons are available at bankrate.com. They also offer many financial calculators and additional financial information. This is a great resource and always a good place to check before you make financial decisions.