Choosing Savings Options

What are you saving for? An annual summer holiday, an education fund for your children or a longer-term goal like retirement? In order to choose how you want to save your money, you will first need to determine your financial goals. The first step is to set a clear savings goal. Having this end goal in sight will help you when it comes to setting aside a specific amount every month or year in order to reach that milestone. Whatever your goal, the amount you set aside to get started does not have to be large. To jump-start your savings, consider automating your accounts to transfer the budgeted amount to your savings each month.

Check out this Saving for a Goal calculator to get started.

Once you’ve set your financial goals, it’s time to start saving. Choosing the right savings method is dependent on a few factors: how much money you hope to save, how accessible you need the funds to be and when you’ll want to withdraw them. It can be daunting to evaluate the complex options available, but if you learn more about each saving vehicle it will be easier to get started.

Savings Accounts

There are many categories of savings accounts to choose from. You can use one savings account or multiple ones to organize your money for various purposes. Many people don’t limit their savings to just one kind of account, but use different accounts based on when they’ll want to withdraw funds and what they want to use them for. Here are examples of a few different savings accounts to fit particular needs.

• Basic bank savings accounts offer the lowest interest rates, usually less than 1 percent. They come with few restrictions on access to your money, and they don’t usually have required minimum balances. These accounts associated with brick-and-mortar banks also can be accessed online.

• Money market accounts are high-yield accounts that pay interest based on the current market rates. They are likely to require a higher minimum balance than a basic bank savings account.

• Online savings accounts are typically similar to basic bank savings accounts, but they offer higher interest rates because they operate online and don’t involve the overhead that standard banks have.

• Credit unions, are like banks, but they’re owned by their members and may offer higher interest on savings.

• Automatic savings plans are options you can set up for your savings account. You can choose to automatically transfer a set amount from your checking account to your savings account every month.

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Certificate of Deposit (CD)

If you don’t mind leaving your money alone for a longer period of time, from several months to years, consider taking out a certificate of deposit (CD). These often yield the highest interest of any savings option offered by banks. Unlike with regular bank accounts, if you want to withdraw money, you may face a steep penalty. Fortunately, CDs come with no risk and no fees. There are several types of CDs to choose from:

• Traditional CDs are the most popular type of CDs, in which you deposit an amount of money at a fixed interest rate for a predetermined amount of time, with the option to withdraw the funds after the term has elapsed.

• Bump-Up CDs provide the option to “bump up” your rate for the remainder of your CD term, following an initial lower rate of interest.

• Brokered CDs are generally priced higher and are purchased through a brokerage firm or sales representative rather than through a bank.

• Jumbo CDs have much higher minimum balance requirements (usually $100,000), but are low risk and provide higher returns than traditional CDs.

• Liquid CDs can be withdrawn without a penalty, but may come with a required minimum balance and a limit on the number of withdrawals permitted.

• Callable CDs have higher rates and are long-term, as long as 10 to 15 years, but also higher risk: financial institutions can "call" back the account if interest rates drop, forcing investors to find a new place for their funds.

• Variable Rate CDs offer variable interest rates that change based on an interest-rate index, resulting in either higher or lower rates than fixed-rate CDs.

• Zero-Coupon CDs are usually long-term investments that are bought at a discount but do not pay interest.

To learn more about certificates of deposit, visit the Securities and Exchange Commission website.

Retirement Account Savings

One of the most valuable ways to save is through retirement accounts. Not only are these low risk, they’re crucial to a comfortable retirement. And remember: the earlier you start saving, the more your savings will grow. There are a few retirement savings options to consider:

• 401(k) Plans are retirement savings accounts sponsored by your employer. You contribute your money before income taxes are deducted, which lowers your taxable income. Many employers will match your contributions, further increasing your retirement fund.

• Individual Retirement Accounts (IRA) are personal savings accounts that enable you to put money aside annually. You can also receive tax breaks for these funds.

• Annuities are investment agreements in which payments to insurance companies are invested for you. The annuities are then paid back on a future date or series of dates. Withdrawals are taxed but fortunately, there are no annual contribution limits.

• Health Savings Accounts (HSA) are similar to traditional IRA accounts in that the contributions are tax deductible, but they are specifically for health care spending, including doctor visits, prescription medications, dental and eye care and other health-related costs.