Saving can be seriously sweet, but you should know there’s more than one way to save.
Saving money can seem less rewarding than, say, seeing every new Will Ferrell movie on opening night, but consider this: What if your buddy has a clever business idea and needs investors? Imagine saying, “Yeah, I’m in for $7,000.” What if you could buy a house in three years? Or ditch your job for early retirement in Hawaii? That could make waiting for Blades of Glory on DVD worth it.
It turns out that saving can be seriously sweet, but you should know there’s more than one way to save. In the right spot, your savings can grow faster and bigger. A smart saving strategy is unique to your lifestyle, so consider our Saving Situations first. Then use our Savings Guide to help you understand more about where you can stash your cash.
Experts suggest everyone should have enough money in a savings account to cover three to six months of living expenses, in case of an emergency. After that, it’s time to start thinking bigger.
Situation: You’re staring down the grim reaper of debt.
Outlook: Paying down high-interest debt first will open up your budget for serious saving later. Each situation is unique, so talk to a professional about the best way to prioritize debt repayment and savings investments.
- While you’re paying down your debt, small payments into an IRA or 401(k) now can mean big payoffs as it compounds in the future.
- Once your debt is paid off, devote the money you’d been using for repayment to your savings instead. You’ll never miss the extra cash.
Situation: You can’t always count on the next paycheck.
Outlook: Choosing flexible saving vehicles will allow you to save for your future and access your money easily if your income hits a shallow spot.
- A high-yield savings account draws more interest than a regular savings account, and is liquid in case you need to withdraw money.
- If you have more income than usual, you can save what you won’t need in the next year or so in a longer-term savings investment to earn more.
Situation: You have a stable income with room for risk-taking.
Outlook: You’ve saved up for a rainy day and now can plan for the more distant future.
- If your employer matches contributions to a 401(k) or an IRA, take advantage of it! That’s free money they’re giving you, so put in as much as you can.
- Investing in mutual funds can be a good idea if you have the desire to get into the stock market, but aren’t confident about building a portfolio of individual stocks.
Each of these vehicles will allow your money to “grow” or compound, something it won’t do sitting in most checking accounts or shoeboxes. Adjust your savings strategy as your situation changes over time.
[Disclaimer: These examples are based on averages and generalities. Each vehicle will vary from institution to institution. Consult with a professional.]
Risk [R] is the chance that the rate of return on your money will be less than expected. Some saving vehicles are tried and true; they take minimal effort on your part. Others take more time in order to get the best return. Generally, the higher the risk, the greater return you could get from your savings.
[R] Virtually Risk Free: Insured; minimal research
[RR] Low Risk: Uninsured; some riskier than others; moderate research
[RRR] Risky: Uninsured; serious research and moderate management
[RRRR] Very Risky: Uninsured; very serious research and management; large time commitment
Basic Savings Account [R]
A basic savings account is a simple account offered by financial institutions. It’s a great place to easily store and retrieve funds on a short-term basis. It makes a good home for an emergency fund. These come in a variety of flavors, so shop around for the best fit.
High-Yield Savings Account [R]
This type of account usually has more withdrawal restrictions than a regular savings account, but has a higher interest rate. Some financial institutions offer these with varying restrictions and perks, so compare before committing.
Certificates of Deposit (CDs) [R]
A CD is a certificate that entitles the holder to receive a specific amount of interest after a set amount of time. You can buy certificates from many financial institutions with maturity dates as short as one month to more than five years. Generally, the longer the term is, the higher your interest rate will be and the more money you will make.
Money Market Deposit Account [R]
Sometimes referred to as a “money market account,” this is an insured deposit account with no maturity date. It is offered by most financial institutions. Some accounts have limits on withdrawals and others may have check-writing privileges.
A bond is a type of loan to the government or a company that is repaid at the end of a term with interest. You can buy bonds with maturity dates of a few months to a few decades. Choose the issuer (government or company) carefully. If they default, they will be unable to pay you when the bond matures.
401(k) & Individual Retirement Account (IRA) [RR]
These are two types of long-term savings accounts for retirement with different tax advantages. A 401(k) is generally offered by your employer. An IRA can be obtained through a financial institution or discount brokers like E*Trade. There are several different types of IRAs, so discuss your options with a professional.
Mutual Fund [RRR]
A mutual fund is a pool of money managed by an investment company. You buy shares of the fund as you would buy shares of a stock. Experts suggest it takes many years for your money to grow substantially. There are other kinds of funds, such as index or exchange-traded. If a mutual fund sounds good to you, then see if some of these funds sound even better.
Stocks are partial ownership in a company. It takes time, effort and research to start investing in stocks, so be prepared to make a commitment. It can be rewarding and exciting, but you should have other dependable savings before jumping into the stock market on your own.