The second tool of monetary asset management is a savings account. A savings account provides you with a readily accessible source of emergency cash and a temporary holding place for funds in excess of those needed for daily living expenses. Interest rates on savings accounts are typically 0.20 to 0.50 percentage points higher than those paid on interest-paying checking accounts
Funds on deposit in a savings account are considered time deposits rather than demand deposits (another term for checking accounts). Time deposits are savings that are expected to remain on deposit in a financial institution for an extended period. Institutions have a rule requiring that savings account holders give 30 to 60 days’ notice for withdrawals, although this restriction is seldom enforced. Some time deposits are fixed-time deposits, which specify a period that the savings must be left on deposit, such as six months or three years; certificates of deposit (CDs) fit this description
Statement Savings Accounts
The typical savings account offered by financial institutions is the statement savings account (also called a passbook savings account). Statement savings accounts permit frequent deposits or withdrawals of funds. No fees are assessed as long as a low minimum
Funds on deposit in a savings account are considered time deposits rather than demand deposits (another term for checking accounts). Time deposits are savings that are expected to remain on deposit in a financial institution for an extended period. Institutions have a rule requiring that savings account holders give 30 to 60 days’ notice for withdrawals, although this restriction is seldom enforced. Some time deposits are fixed-time deposits, which specify a period that the savings must be left on deposit, such as six months or three years; certificates of deposit (CDs) fit this description
Statement Savings Accounts
The typical savings account offered by financial institutions is the statement savings account (also called a passbook savings account). Statement savings accounts permit frequent deposits or withdrawals of funds. No fees are assessed as long as a low minimum
balance ($25 to $100) is maintained. Statement savings account holders are provided with printed receipts to document their account transactions, and transactions usually can be accessed through ATMs. The process for opening a savings account is similar to that for a checking account. All depository institutions offer time deposits. In the following subsections, we examine ways to save, savings account interest, the implications of the Truth in Savings Act, and grace periods.
Certificates of Deposit
A certificate of deposit (CD) is an interest-earning savings instrument purchased for a fixed period of time. The required deposit amounts range from $100 to $100,000, while the time periods range from seven days to eight years. The interest rate in force when the CD is purchased typically remains fixed for the entire term of the deposit. Depositors collect their principal and interest when the CD expires. Certificates of deposit are insured through the FDIC or the NCUSIF if purchased through an insured depository institution
Interest rates on longer-term CDs are usually higher than the comparable rates on shorter-term instruments. This difference is meant to reward savers for accepting higher risk: The longer they own a CD, the more their money is subject to inflation risk. The purchasing power of their funds on deposit and the interest received goes down because of inflation. This is why longer-term savers demand higher returns than shorter-term savers.
Variable-rate certificates of deposit (or adjustable-rate CDs) are also available. These instruments pay an interest rate that is adjusted (up ordown) periodically. Typically, savers are allowed to “lock in,” or fix, the rate at any point before their CDs mature. This variability detracts from the main virtue of the fixed-rate CD predictability. The best variable-rate CDs have a guaranteed minimum interest rate. Bump-up CDs allow savers to bump up the interest rate once to a higher market rate, if available, and to add up to 100 percent of the initial deposit whenever desired.
Certificates of Deposit
A certificate of deposit (CD) is an interest-earning savings instrument purchased for a fixed period of time. The required deposit amounts range from $100 to $100,000, while the time periods range from seven days to eight years. The interest rate in force when the CD is purchased typically remains fixed for the entire term of the deposit. Depositors collect their principal and interest when the CD expires. Certificates of deposit are insured through the FDIC or the NCUSIF if purchased through an insured depository institution
Interest rates on longer-term CDs are usually higher than the comparable rates on shorter-term instruments. This difference is meant to reward savers for accepting higher risk: The longer they own a CD, the more their money is subject to inflation risk. The purchasing power of their funds on deposit and the interest received goes down because of inflation. This is why longer-term savers demand higher returns than shorter-term savers.
Variable-rate certificates of deposit (or adjustable-rate CDs) are also available. These instruments pay an interest rate that is adjusted (up ordown) periodically. Typically, savers are allowed to “lock in,” or fix, the rate at any point before their CDs mature. This variability detracts from the main virtue of the fixed-rate CD predictability. The best variable-rate CDs have a guaranteed minimum interest rate. Bump-up CDs allow savers to bump up the interest rate once to a higher market rate, if available, and to add up to 100 percent of the initial deposit whenever desired.
Money withdrawn from a CD before the end of the specified time period is subject to interest penalties. For certificates held less than one year, the depositor may lose a minimum of one month’s interest; on certificates held more than a year, the depositor may lose a minimum of three months’ interest. If the penalty exceeds the interest amount, you will get back less than you deposited. Consequently, before putting money into a CD, make sure that it is appropriate to tie up your funds in this way.
Because you do not make deposits and withdrawals after initially investing in a CD, you have no reason to restrict yourself to a nearby institution when searching for the highest yields. Lists of institutions paying the highest yields on CDs are updated weekly at www.bankrate.com. You might also check with a stockbroker for high CD yields because brokerage firms often buy CDs in volume to resell to individuals as brokered certificates of deposit. All types of CDs are excellent tools for managing monetary assets, and as banking deposits, they enjoy the added protection of federal deposit insurance
How to Save
Americans have the lowest savings rates among the major countries of the world. When asked, they typically complain that there simply is no money left over at the end of the month. In a sense, they are correct, but they are thinking about savings in the wrong way. Wise financial planners take a different approach. They follow the adage “pay yourself first,” which means to treat savings as the first expenditure after or even before getting paid. Build savings into your budget right from the beginning. In this way, you can effectively build funds to provide for large, irregular expenaccount ditures or unforeseen expenses; meet short-term goals; or save for retirement, a down payment on a home, or children’s college education. Saving is not glamorous; slow and steady wins the race. Your first savings goal is to accumulate enough money to cover living expenses (perhaps 70 percent of gross income) for three to six months. This money will serve as an emergency fund in case of job layoff, long illness, or other serious financial calamity. For a person with a $30,000 gross annual income, a three-month emergency fund would be $5250 ($30,000 12 $2500; $2500 0.70 $1750 for each month). People who should consider keeping more funds available perhaps income to cover six months to a year of living expenses include those who depend heavily on commissions or bonuses or who own their own businesses.
Savings Account Interest
The calculation of interest to be paid on deposits in financial institutions is primarily based on four variables:
1. Amount of money on deposit
2. Method of determining the balance
3. Interest rate applied
4. Frequency of compounding (such as annually, semiannually, quarterly, monthly, or daily)
The Truth in Savings Act requires depository institutions to disclose a uniform, standardized rate of interest so that depositors can easily compare various savings options. This rate, called the annual percentage yield (APY), is a percentage based on the total interest that would be received on a $100 deposit for a 365-day period given the institution’ s annual rate of simple interest and frequency of compounding. The more frequent the compounding, the greater the effective return for the saver. The institution must use the APY as its interest rate in advertising and in other disclosures to savers.
Wise money managers select the savings option that pays the highest APY and avoid institutions that assess excessive costs and penalties. Given the same APY, savers should choose an institution that compounds interest daily. Comparison shopping could easily earn you an extra $10 to $20 each year on a $1500 savings account balance. Smart savers also consider the fees and penalties outlined in Table 5.2 when deciding where to open a savings account
An account with a grace period provides the depositor with a small financial benefit. A grace period is the period (in days) during which deposits or withdrawals can be made and still earn the same interest as other savings from a given day of the interest period. For example, if deposits are made by the tenth day of the month, interest might be earned from the first day of the month. For withdrawals, the grace period generally ranges from three to five days. Thus, if a saver withdrew money from an account within three to five days of the end of the interest period, the savings might still earn interest as if the money remained in the account for the entire period
Because you do not make deposits and withdrawals after initially investing in a CD, you have no reason to restrict yourself to a nearby institution when searching for the highest yields. Lists of institutions paying the highest yields on CDs are updated weekly at www.bankrate.com. You might also check with a stockbroker for high CD yields because brokerage firms often buy CDs in volume to resell to individuals as brokered certificates of deposit. All types of CDs are excellent tools for managing monetary assets, and as banking deposits, they enjoy the added protection of federal deposit insurance
How to Save
Americans have the lowest savings rates among the major countries of the world. When asked, they typically complain that there simply is no money left over at the end of the month. In a sense, they are correct, but they are thinking about savings in the wrong way. Wise financial planners take a different approach. They follow the adage “pay yourself first,” which means to treat savings as the first expenditure after or even before getting paid. Build savings into your budget right from the beginning. In this way, you can effectively build funds to provide for large, irregular expenaccount ditures or unforeseen expenses; meet short-term goals; or save for retirement, a down payment on a home, or children’s college education. Saving is not glamorous; slow and steady wins the race. Your first savings goal is to accumulate enough money to cover living expenses (perhaps 70 percent of gross income) for three to six months. This money will serve as an emergency fund in case of job layoff, long illness, or other serious financial calamity. For a person with a $30,000 gross annual income, a three-month emergency fund would be $5250 ($30,000 12 $2500; $2500 0.70 $1750 for each month). People who should consider keeping more funds available perhaps income to cover six months to a year of living expenses include those who depend heavily on commissions or bonuses or who own their own businesses.
Savings Account Interest
The calculation of interest to be paid on deposits in financial institutions is primarily based on four variables:
1. Amount of money on deposit
2. Method of determining the balance
3. Interest rate applied
4. Frequency of compounding (such as annually, semiannually, quarterly, monthly, or daily)
The Truth in Savings Act requires depository institutions to disclose a uniform, standardized rate of interest so that depositors can easily compare various savings options. This rate, called the annual percentage yield (APY), is a percentage based on the total interest that would be received on a $100 deposit for a 365-day period given the institution’ s annual rate of simple interest and frequency of compounding. The more frequent the compounding, the greater the effective return for the saver. The institution must use the APY as its interest rate in advertising and in other disclosures to savers.
Wise money managers select the savings option that pays the highest APY and avoid institutions that assess excessive costs and penalties. Given the same APY, savers should choose an institution that compounds interest daily. Comparison shopping could easily earn you an extra $10 to $20 each year on a $1500 savings account balance. Smart savers also consider the fees and penalties outlined in Table 5.2 when deciding where to open a savings account
An account with a grace period provides the depositor with a small financial benefit. A grace period is the period (in days) during which deposits or withdrawals can be made and still earn the same interest as other savings from a given day of the interest period. For example, if deposits are made by the tenth day of the month, interest might be earned from the first day of the month. For withdrawals, the grace period generally ranges from three to five days. Thus, if a saver withdrew money from an account within three to five days of the end of the interest period, the savings might still earn interest as if the money remained in the account for the entire period
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Savings rates will vary between institutions and over time depending on the market. Account holders can compare savings rates to discover those that offer the best opportunity to earn and change financial institutions as needed to ensure they are making the most of their savings over time.guarantor loans
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