Bank-Based Savings Instruments
By: Source: AARP.org Date Posted: 2005-03-20 12:08:21
There are many ways to save your money. Anyone with a few dollars can open a savings account or buy a U.S. Savings Bond. Those with a little more cash to spare can purchase a certificate of deposit or open a money market account. It pays to look into all your savings options to find the one that best fits your needs.
Savings Accounts
When you deposit money in a savings account, you give your bank the right to use your money for a certain period of time. In return, the bank pays you a fee, which is called "interest." The amount of interest you receive depends on how much money you have in the bank and what the bank's interest rate is.
It's best to use your savings account to fund short-term goals, to create an emergency (or reserve) fund, and to hold money for you until you can decide where you want to invest it.
If your bank goes out of business, the Federal Deposit Insurance Corporation (FDIC) will replace the money you had in your deposit account, up to $100,000. The National Credit Union Administration (NCUA), a U.S. Government agency, usually insures credit union accounts in the same way.
Certificates of Deposit
A certificate of deposit, or CD, is a special type of deposit account that you can open with a bank, savings and loan association, or brokerage firm. CDs offer a higher rate of interest than regular savings accounts. Like savings accounts, they are insured up to $100,000.
When you purchase a CD, you agree to let a bank use your money for six months, one year, five years, or more. In exchange, the bank pays you interest at regular intervals. When you cash in your CD, you receive the money you originally invested, plus any interest the bank owes you.
Money Market Accounts
Money market accounts are like savings accounts, except that they provide a higher interest rate. Your bank takes your money market investment and puts it in short-term securities, such as Treasury Bills and corporate bonds. The FDIC insures your deposits against loss.
Usually, you must deposit at least $1,000 to open a money market account. Your bank may restrict how often you use your account. You may only be able to make a certain number of withdrawals and transfers each month. There may also be a limit on the number of checks you can write each month.
U.S. Savings Bonds
You can buy a U.S. Savings Bond for as little as $50 or as much as $10,000. The federal government backs all bonds. Most financial institutions and some employers sell U.S. Savings Bonds. You can also shop for Savings Bonds online.
For More Information
The Consumer Federation of America
The Consumer Federation of America conducted a survey that showed that American consumers lose $30-50 billion each year due to low-interest savings accounts. The survey showed that most consumers aren't aware of higher-rate savings options.
URL: www.consumerfed.org/release17oct.pdf
Savings Calculators
The American Savings Education Council and the Employee Benefit Research Institute have launched a ‘Choose to Save’ education campaign designed to help Americans plan for retirement. Visit the ‘Choose to Save’ web site for a list of financial calculators in 12 categories. The site's Savings Calculators help you figure out how much your savings will be worth in the future; what it will take to save for a new car, home, or a college education; and how taxes and inflation will affect your savings.
URL: www.choosetosave.org/calculators
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