How to Make the Most of Your Savings Accounts

There are many ways to save and invest your money, whether you’re putting it away for a special occasion, a purchase, retirement, college, or something else. While you’re saving, it’s good to remember that your money can make you MORE money while it’s in savings. It does this by accruing interest or dividends.

How can you make the most of your savings accounts? It takes a little thought, but it’s actually pretty simple. Just choose the right account for the type of money you’re saving. So what’s out there and how do you determine when and where to save your money? Here are the basics.

Savings account

A savings account is your most basic savings tool and the best place for keeping funds you may need to access at any point. This is the money you will need to cover emergency expenses or help you weather the loss of a job.

As a general rule, you should keep three months’ worth of expenses tucked away as your emergency fund. If this seems like a lot, don’t worry. You can build up to it slowly by reducing your debt and saving a little each month. Simply figure out how much you need to save and transfer a set amount (as much as you can afford) to your savings account when you deposit your paycheck each month. To simplify the process, you can set up a recurring automatic transfer from your paycheck to your savings account.

Dedicated Savings accounts

Once you have your emergency fund padded with three months’ worth of wages, you can start thinking about saving for large items you want—a vacation, a car, or some other large purchase or experience. A good way to do this is to open a secondary, dedicated savings account.

This dedicated savings account won’t necessarily offer a higher interest rate, but is useful because it allows you to separate your everyday savings from your special purpose savings.

For example, I paid my car off in March and started another savings account for my next car. Since I was already used to making payments, it was easy enough to make the payments into a savings account rather than to a dealership. When I’m ready to replace my current car, I’ll have the money for a down payment, which will help keep my next car payment lower.

Money Market accounts

Money market accounts are a cool hybrid account. You tend to get a higher interest rate, like you might with a Certificate. You have full access to your funds, like you do with a savings account. And you can often write checks, like you can from a checking account. This is a very unique type of account.

A money market account is a good place to save for insurance or property tax payments. This can also make a good place to save for a specific purpose, but you’ll have to be mindful about how many transactions you’ll need to make per month.

Certificates

Certificates generally offer a higher rate of return than other deposit products because they require that you don’t touch your money for a longer period of time (usually six months or longer). Generally, you will be penalized if you withdraw before the Certificate’s maturity date. If you have extra money that you can afford to put aside and leave untouched for a stretch, this is a great place to put it and earn more in interest.

The longer you’re willing to invest, generally the higher the rate will be. If you’re comfortable with five- to six-year term, that’s where you’ll get the better rates and you’ll be locked in at the higher rate for the full term, regardless of whether interest rates go down during that timeframe.

One thing to keep in mind is that Certificates do often require a minimum balance in order to earn the premium interest. Not all minimum requirements are the same, so while you’re shopping around for rates, you can also shop around for a minimum balance that fits your budget.

Interest-bearing checking accounts

Checking accounts don’t pay much for interest because money tends to flow so freely through them. However, if you can get an interest-bearing checking account, they can be a nice way to earn a little more on your money. Just make sure there is no minimum balance, or that the minimum balance is easy to maintain. Some banks charge a fee if you go below the minimum balance (which kind of defeats the purpose, don’t you think?).

As you’re comparing checking accounts, look into what other fees or charges will affect the account because they may negatively offset interest you earn. You’ll also want to find out if there are transaction limits on the account that may restrict access to your money.

Retirement accounts—IRAs and 401(k)s

If your employer offers matching payments on your 401(k) retirement account, I strongly encourage you to take advantage of the offer. If you don’t, you’re leaving money on the table. If your employer doesn’t offer a retirement account and you want to set aside money, an Individual Retirement Account (IRA) is a great option.

There are two main types of IRAs: the Traditional IRA and the Roth IRA. Traditional IRAs are tax-deferred, which means you don’t pay taxes until you withdraw the money, allowing you to save more each month. With the Roth IRA, you pay taxes on the money before it goes into the IRA, which means you won’t have to pay taxes on that money later. There are pros and cons to both, so you’ll want to do a little research or speak to your financial advisor to choose the best option for you.

When it comes to IRAs, the earlier you begin contributing, the more your savings will multiply. You will want to work with a financial advisor to make sure you are investing enough, in the right type of account, and at the ideal risk level for you. Most advisors will meet with you for free initially, which gives you a chance to see if they are a good fit for you. A lot of people think of financial advisors as a consultant only wealthy people can afford, but that’s not true. It’s helpful to talk to a professional regardless of your income level, because they can help you determine how to make the most out of the money you have.

Consider the options

By spreading your money out over a number of accounts, you can keep some money handy for your regular expenses, while earning more on money you don’t need at the moment. Regardless of which account you are looking into, shop around to make sure that you get the best interest rates, lowest fees, and that you can keep up the minimum balance. All financial institutions are different, so take some time to compare and contrast and find the best options for you. If you’re not sure which direction to go in, talk to someone who can help you figure out which account is right for you.