Whether it’s a college education for your kids, a beach house, retirement or just a rainy day fund having money saved can bring you peace of mind and a sense of accomplishment. As you watch your bank balance grow, you may begin to wonder if you’re doing everything you can to maximize your returns. After all, interest rates for plain savings accounts are rather paltry. However, you also don’t want to put your savings at too much risk.
The first step to choosing an alternate savings vehicle in which to keep your savings is to consider the timeline and risk tolerance of your goal. For example, a goal of owning a beach house in ten years has much more leeway built in. Depending on how your savings goes, you can accelerate or push back the purchase. Conversely, a plan of financing a child’s education can be calculated almost down to the month you will have to write the first tuition check. There is little to no room for error, unless you fancy explaining to Junior that you’ve lost his college fund in a bad market. By being clear with your goal, you will be armed to make a solid decision.
If your goal has a timeline of under five years, you would do well to consider a money market account or a Certificate of Deposit (CD). Both products can be opened at virtually any bank. Be sure to search for the best rates in your area before making a commitment, and be sure you understand any early-withdrawal penalties entirely. The beauty of both of these products is that they are fully insured up to $250,000 by the FDIC. This means that even if the bank were to fail, your funds are protected and will be returned to you – under most circumstances.
For a money market, most banks can even set you up with an automatic savings plan set to pull funds from your checking on a set schedule. This will automate your savings and save you the time of making withdrawals and deposits towards your goal. It works much like a savings account, except the minimum balance is usually higher and the interest rate far better.
CDs offer you a set amount of interest over a pre-determined term. You know exactly what you’re getting and when the money will once again be yours. The only caveat to keep in mind is that you must cash it out yourself at the end of the term. Most banks will simply roll the funds if you do nothing, and lock the money in for far longer than your originally intended.
Long Term Goal: Retirement
Check with your employer first. Most offer a 401(k) plan, at the very least. 401(k) plans allow you to save for retirement in pre-tax dollars, which reduces your tax burden. Many employers also offer a match, which they will deposit into your 401(k) account along with your own contributions. With a 401(k), you usually have the option of being ultra-conservative, high-risk, or somewhere in the middle. See your payroll department to see what type of funds are offered in your 401(k).
Long Term Goal: Education for a Child
529 plans and Coverdells are the best plans for saving for college, but keep in mind that they both have their limitations. Both work like Roth IRAs, in that they are not tax-deductable now, but grow and are used tax-free later.
A 529 is to be used for higher education only, and has very high contribution limits. However, they never expire and can be passed on to someone else if the child decides not to pursue an education or is awarded a scholarship.
A Coverdell can be used for K-12 expenses as well, quite a boon if you are considering a private high school. Funds held in a Coverdell must also be used by the time the recipient is 30- quite a feat if he or she decides on completing an extraordinarily advanced degree, such as a PhD.
Overall, savings accounts are great for a small amount, but once you reach a few thousand dollars or so, one of these products may make more sense. As with any financial decision, be sure to weigh the limitations and risk carefully before deciding on the best place to keep your savings.