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Smart Ways to Start Saving as Interest Rates Rise

Easy and economical account options to build emergency funds and retirement nest eggs

Chart of stock bonds growth with a black pen over the newspaper.
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It’s easier than ever to start a savings plan, whether you're putting away money for retirement, a vacation or an emergency. All you have to do is decide what savings vehicle is right for you.

Not so long ago, banks, mutual funds and brokerages would demand that you pony up $1,000 or more to open an account, or to get a higher yield. Some still do, but the number of banks that require no minimum deposit to get high yields is growing.

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Most of those institutions also offer automatic investment plans, sparing you the annoyance of having to write checks to your savings account every month. The financial world is glad to open an account for you, even if you have very little money, and tap your other funds on a regular basis to help it grow.

Even better, you can now get a bit of interest on your savings, as opposed to nothing, which had been the case the past several years. The average one-year yield on a bank certificate of deposit, for example, has doubled in the past year, according to Bankrate.com. (That comes to about 2 percent but still: better than 1 percent). Some savings accounts are yielding 2 percent as well.

Your choice: where to put your money, and how long you plan to keep it there. Typically, you earn more the longer you lock up your savings. You also earn more if you’re willing to take more risk.

Barriers falling down

A decade or so ago, if you wanted to earn the top interest rate a bank had to offer, you had to bring serious money to the table — sometimes as much as $100,000. Today, you’ll still get more love — and interest — from your bank if you come with $100,000, but you can also get top yields at some banks that have no minimum-deposit requirement.

Mutual funds, brokerages and banks too have been lowering fees and minimums for the past decade. The reason? Competition, says Christine Benz, director of personal finance at Morningstar, the Chicago investment trackers. “For the past decade-plus, investment providers have been locked in an arms race to lower fees and lower or remove investment minimums,” she says.

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Financial companies are also starting to believe what they have long said: Small investors eventually become large investors. “Firms are playing a long game,” Benz says. “They recognize that even if an investor isn’t necessarily profitable for them early on, they may be later on as they pay for other services, such as advice, or swap into higher-cost products.”

So, you can now get access to low-cost and low-minimum investments for, well, nothing. Even better: There are few financial services funds that won’t tap your bank account on a regular basis, letting you put your savings on autopilot. It’s far easier than having to transfer funds on your own each month. “My best advice is to automate those savings contributions, just as you might do with 401(k) plan contributions,” Benz says.

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The question, then, is what kinds of investments you should choose for your savings goal, whether it’s an emergency fund or a vacation in Bora-Bora.

Safe and short term

Your first savings goal should be an emergency fund. If your refrigerator dies or your transmission sounds like a cask of nails rolling down the stairs, you’ll need an emergency fund to pay for it. It’s always better to pay cash for emergencies than to rack up a credit card bill that will take you years to repay.

If you’re still working, you’ll need the equivalent of several months’ expenses in case you’re laid off. (This is particularly important if the economy looks shaky, as it does now). Financial planners say that you should have three to six months’ worth of pay stashed away, which is a daunting amount. Don’t let that stop you: If you save enough for a transmission or a new refrigerator, you will have a good start.

You want to be able to tap the account at any time without penalty, which leaves two main options: savings accounts and money market mutual funds. Savings accounts, offered by banks, typically let you tap them at will and are covered by federal banking insurance. Currently, you can get savings accounts that yield as much as 2.2 percent, according to Bankrate.com. Although that’s not a match for inflation, which has raged at 9.1 percent the past 12 months, it’s still 2.2 percentage points more than you’re probably getting on your checking account.

You’ll often get the best rates on savings accounts from online banks, which don’t have to pay for those marble lobbies. Online bank accounts are federally insured, and the banks offer other banking services online, such as home loans, debit cards, credit cards and even airline points. Bankrate.com currently lists three online banks with savings accounts yielding more than 2 percent, all with minimums of $1 or less.

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Money market mutual funds are mutual funds that aim to keep their share prices at a constant $1. Their yields rise and fall with short-term interest rates. The current average money fund yield is 1.89 percent, according to Money Fund Intelligence, although several funds yield above 2 percent. If the Federal Reserve keeps raising interest rates, your fund’s yield will rise with it. You can access many money market funds with no minimum investment requirements through discount brokerages (more on those below).

Long-term, but riskier

If you’re saving for retirement, you need a wide array of investments, such as stocks, bonds and money market funds. Stock and bond mutual funds are long-term investments, which means you should plan on holding them for 10 years or more, experts advise. Typically — but not always — you’ll earn more in stocks and bonds than you would in savings accounts over a 10-year period, despite occasional terrifying ups and downs. Most people invest in stock and bond funds to achieve a long-term goal, such as a college education fund for young children, or a retirement account for themselves.

Ideally, you have a 401(k) or similar retirement savings plan at work. In a traditional retirement plan, your money goes into the account before taxes are taken out, which is a huge advantage when building a retirement fund. Your take-home pay falls less than the amount of your contribution because you’ve reduced your taxable income — and the tax you owe.

Nevertheless, about half of all private sector workers don’t have access to a workplace savings plan, something that AARP is working hard to improve. In the meantime, you can start an individual retirement account or just a savings account at many discount brokerages (and some mutual fund companies) with no initial investment, and often no fees to buy or sell securities.

For example, discount brokerages Charles Schwab & Co., Fidelity Investments, TD Ameritrade, Merrill Edge and E*Trade have no minimum investment requirements to start an account. If you’re looking for a money market fund with no minimum, for example, you can find one — as well as hundreds of stock and bond funds — at these discount brokerages. In many cases, you won’t be charged a commission to buy or sell any of these funds, either.

“If retirement saving is a goal, a good all-in-one fund, like a target-date fund or a static-allocation fund, is a solid choice for those automated contributions,” Benz says. “The idea is to remove as many frictions as possible, so by automatically investing in an all-in-one fund, you’re eliminating the stressful decisions of whether it’s a good time to invest and what to invest in.”

John Waggoner covers all things financial for AARP, from budgeting and taxes to retirement planning and Social Security. Previously he was a reporter for Kiplinger’s Personal Finance and USA Today and has written books on investing and the 1998 financial crisis. Waggoner’s USA Today investing column ran in dozens of newspapers for 25 years.

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