Saving Accounts 101

What is a savings account? How do I make money using one? What are my options?

Savings accounts are the safest place for you to keep your money because the money you invest in insured by the federal government. This means that even if something were to happen to the bank you save with, your money would be secure. With a savings account, you are lending a bank your money and getting paid a small interest rate as compensation for what you lend. A savings account is a great place to keep your emergency fund (more on this later!) or money you are going to need in the near future but it isn’t a great place if you are looking to find financial freedom and harness the power of compound interest. At most traditional banks (TD Bank, Wells Fargo, etc.) are currently offering savings rates between 0% and .05%. This means that if you put $1000 in one of these accounts at the end of the year you would have between $1000 and $1000.05. This shows us a very safe place to store money, but not one that will really help us in reaching our financial goals. Luckily, we have other safe options to check out.

I only heard of a high yield savings account a few years ago, and it changed how I use savings accounts. It is the same concept of a traditional savings account but they offer you a higher yield on your investment. Currently, this rate is about 1.5%. To compare this with a traditional savings account, if you invested the same $1000 in a high yield savings account at the end of the year you would have $1015. This is still not financial freedom money, but if given the choice between 50 CENTS and 15 DOLLARS, for the same investment it’s an obvious choice. They are able to offer this significantly higher rate because they are typically online only accounts. This means that you can’t walk into a local branch if you need help with your account or grab money from a convenient ATM, but in my experience they are easy to use and offer great customer service. I actually have found that since it is slightly harder for me to reach my money in my high yield savings account that I actually have an easier time not touching it and keeping it in savings which is the most important thing. I keep my emergency fund in an American Express High Yield Savings Account where it is able to slowly grow.

Another option for investing your money in a savings account is to save with a local credit union. Credit unions are financial co-ops where members are able to save and keep the money in their community. When you invest in a big bank, the money is no longer local and you don’t have a say in how the bank uses it. With co-ops, the money stays local and you can even sometimes have a say in how its lent out. Traditional savings accounts in credit unions are typically offering between .1% to .5%. Circling back to the $1000 invested for a year this works out to $1001 to $1005. You earn less than in a high yield savings account, but A LOT more than a traditional big bank will offer you. Another perk is that local credit unions typically offer their members lower fees if you need to borrow money for a car payment or a mortgage.

These accounts all share being safe, easy to access, places to store your money but each offers different perks. I keep my emergency fund in an American Express high yield savings account so my money is working for me, but I also have a savings account at my local credit union (Vermont Federal Credit Union) where I keep a smaller portion of my savings before it’s allocated to other investments. I feel strongly that big banks aren’t paying savers enough money, and that we need to start saving where we are being compensated more fairly, or at least supporting our community with our savings.

Click here to go back to Introduction to Asset Allocation

Click here to read about Bonds 101