savings is the base of your financial pyramid. It is the foundation
of your family's well-being and it's your starting point to building
wealth. Starting a sound savings program isn't difficult, but it
takes some thinking, planning, and commitment.
first savings priority should be to build the money you'll want
on hand for immediate and short-term needs. This money could be
for a specific upcoming expense like a vacation, an educational
class for your children or anything you expect to pay for in the
near future. In addition, you should set aside enough savings to
serve as an emergency fund. An emergency fund is basic financial
protection in the event of a medical emergency, household catastrophe,
job loss, or other unforeseen expenses. Financial professionals
generally suggest saving the equivalent of three to six months of
your household expenses.
need to devise a savings strategy that maximizes your return. What's
the best place for your savings? Your initial choice may have been
a traditional statement savings account at your bank; this is fine
for many purposes but is not the only savings option that your bank
offers. Knowing about the various options can help you build greater
wealth for the future.
Accounts, Money-Market Accounts, Certificate of Deposits
accounts or "passbook" accounts have long been the classic place
to start building your money. You receive interest on your funds
and the Federal Deposit Insurance Corporation (FDIC) insures your
savings for up to $100,000. Typically, the savings accounts yield
low interest rates. And, over time, the rate you earn on a savings
account may not keep up with inflation.
market accounts (MMAs) invest in short-term securities by the bank
or investment firm managing the account. MMAs offer higher interest
rates than a standard savings account, but usually requires a minimum
balance, limits the number of withdrawals per month, and often charges
a monthly service fee if the minimum balance isn't maintained. MMAs
are also insured by FDIC and therefore considered a low risk investment.
of deposit (CD) is a short to medium-term, FDIC insured investment
available at banks and savings and loan institutions. CDs are low-risk
investments that yield a predetermined interest rate for a fixed
period of time. It is important to know that if you choose to withdraw
your money from a CD before it has matured you will pay a harsh
concept to understand when buying a CD is the difference between
annual percentage yield (APY) and annual percentage rate (APR).
APY is the total amount of interest you earn in one year taking
into account compound interest. APR is simply the stated interest
you earn in one year, without taking compounding into account. Compounded
interest is a great feature because it allows you to earn interest
on your interest. For example, if you invest $1,000 in a CD that
has 5% annual percentage yield (APY), then you will earn $50 in
your first year. As long as you leave that $50 invested in your
CD, then you will earn 5% interest on $1050 the following year.
Elizabeth Pratt, Salary.com contributor