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Financial Freedom

Plan to Save: It’s Easier Than You Think

From CDs to money market accounts, which way is the right way for you to save?

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1) Pay Yourself First

First, it’s essential for you to think of saving money the same way you think of paying a bill — a bill that has priority over all the others. Pay it every month.  The only difference is that you're sending the check to yourself.  Pay yourself first before you pay anything or anyone else and not what’s left over after you have paid everyone else. 

Set short- and long-term savings goals.  Let’s say you want to save money for specific things. They may be short-term — such as fixing a broken muffler, buying a new washer and dryer, taking a vacation — or they may be long-term such as preparing for your retirement. 

Save your money, in different account types, based on your short- or long-term goals.

For money you expect to need in the short term, you can choose among several savings vehicles — savings accounts, money market accounts, money market mutual funds and CDs. 

Savings accounts. Several different kinds are available to you: A basic bank account with low interest; a high-yield savings account, which usually comes with some restrictions; and an online savings account. Look for competitive rates and make sure that the bank is insured by the Federal Deposit Insurance Corp. (FDIC).

Money market accounts. These may provide higher interest rates than a savings account but have higher minimum balance requirements. There may be caps on check writing and withdrawals.

Understand how banks calculate interest. Two different numbers may be used: annual percentage yield (APY) and annual percentage rate (APR). APR is used for loan accounts such as credit cards and APY is used for savings and CD accounts. 

Money market (MM) mutual funds. These are similar to MM accounts, but they are mutual funds and are not covered by FDIC insurance. They There is generally have little risk, but they are not risk-free. New temporary insurance programs are available that financial companies can use to cover MM funds, and most big mutual fund companies use such insurance. There may be caps on check writing and withdrawals.

Certificates of deposit (CDs). You may face a withdrawal fee if you take your money out before the term is up. The longer you commit your money, the higher the interest rate.

While there has been a general trend toward increasing use of CDs by African Americans 50 and older, only 12 percent of African Americans have CDs versus 24 percent for all other 50-plus  Americans (Scarborough PRIME NExT +, 2008 ).

Next: Create an Emergency Fund and Save >>

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