Saving money is basically just setting aside a percentage of current income now to create a financial hedge or surplus for use in the future.
Cash accumulation methogs come in many different forms. Additionally, there are several reasons that people choose to save. However, your method for saving should be based on what you plan to do with the money in the final analysis.
1. Petty Cash Savings Accounts. When saving for just a high ticket item or for a minimal amount of time, or to accumulate an funds as a surplus against emergencies, a passbook savings account is the best method. You should dump bloated items that steal your cash, so that you can sock away at least $1000 into what I call a Rainy Day or Lean Fund. The reason you want to put this in the bank is because it is basically liquid. You can get it very quickly without going through much trouble.
This type of account is only good for short term money savings. You have flexibility with it. You can deposit and withdraw money to your account and earn interest, based on your average daily balance. The interest gained will be very low though because it is not a wealth accumulation vehicle.
If you make a mistake and use more money then what is currently on deposit in your account the bank will charge you an insufficient funds fee as high as $40 per occurrence. The bank will sometimes forgive your error and return this fee if you ask them to. They won’t do this for you every month though.
2. Checking accounts that bear interest. The best aspect of having this type of account is the ease of use it offers. You get to transact your daily business through this type of account and earn a bit of interest at the same time. That’s a twofer. Generally these types of accounts come with a host of other privileges like checks, online bill payment schematics and Visa and Mastercard based debit cards.
In order for you to not be charged a monthly fee to maintain this account you typically must maintain a daily balance as high as $2,000. Should you be neglectful of this account and become delinquently overdrawn with the bank, you will be reported to ChekSystems. A report to ChekSystems will mean exclusion from having a checking account with virtually every American bank or Credit Union for up to five years or longer depending on the severity of your account abuse.
3. Secured money market accounts (MMA). These accounts are backed by the Federal Deposit Insurance Company and are not as quickly accessible as your general savings or regular petty cash savings account. If you don’t need access to this money as much as the funds in your savings account then this is the way you want to go. It offers more return on your deposited dollars but you won’t be able to run down to the local ATM to make a fast withdrawal as easily. You will likely have to fill out paperwork and send it in to the company to cash in shares or write one of the limited number of checks that they give you when you first establish this account. If you can allow these funds to stay socked away without regular withdrawals then an MMA is for you.
If you have a larger balance on deposit in this type of account, this means the account will accrue at a higher interest rate. Don’t go to the bank for a money market account though. They usually offer considerably less than the money market accounts offered by insurance companies or other investment companies.
4. “CDs” or Certificates of Deposit. This savings venue is attached to a measurement that requires a specified amount of time. You deposit your money in the bank for 30 days up to 5 years and the bank hands you a piece of paper that will mature or be redeemable on a specified date. If you cash in your cd early, you stand to loose money and a penalty may be attached as well. The general rule is the longer you leave it alone to grow the bigger your pot will get.
Keep in mind that usually insurance companies offer better deals on interests compared to banks, so before you invest, compare rates first! However, you should avoid saving your money in a life insurance product. It is wiser to keep your savings and life insurance coverage separate. Otherwise, you will pay higher amounts for your insurance and your money will grow at little or no return for up to three years initially and for the duration of the account compared to other investment alternatives.
Remember, the savings or investment vehicle you choose to use should be based on your overall financial objective. Diversification is not just making sure that you don’t put all your eggs in one basket. It also means that you have to look at whether you can afford the risk of losing your total investment.