When you’re trying to get your finances in order and build that financially secure life, one of your biggest questions may be where to put your savings, stuffed under your mattress just won’t do.
The first thing you need to recognize is not all savings are alike.
Depending on what you’re saving for and when you will need the money, will decide where you should put your saved dollars.
But no matter what length of time you need to save these dollars, there are 3 questions you need to answer about the types of accounts and banks you look at:
- Are there any fees or hoops to jump through?
- How easy can you get to your money?
- What is the interest/return rate
Are there any fees or hoops to jump through?
In today’s banking market, there are so many free options available that it does not make sense to put up with fees or special requirements for basic bank accounts anymore.
If your local bank charges monthly fees or requires a minimum monthly balance or deposits to waive fees, it is time to get a new bank.
Online banks like Ally (which we personally use) provide free checking, savings, money market, and CDs with no minimums. They don’t have any brick-and-mortar stores to rent or maintain, so they are able to offer higher interest rates for no fees.
How easy can you get to your money?
Certain accounts, like savings accounts, have federal laws allowing only so many withdrawals in a month. In 2021, it is 6 withdrawals and/or transfers out a month.
Certificates of Deposit (CDs) usually require you to lock your money into the CD for a certain amount of time in order to get the advertised interest rate and penalize you for taking money out before the designated time.
Sometimes CDs offer rates a little bit higher than regular savings accounts, but not much in recent years. So you have to decide if they are worth the extra hassle of getting the money out.
Most banks, nowadays, let you set up online access, bill pay settings, and bank to bank transfers. Make sure you can get your money when you need it for its designated purpose.
What is the interest/return rate?
Depending on how soon you will need your saved monies, you will have different options for earning interest or returns in your account.
Many banks, like Ally, offer interest-earning checking accounts. These are just normal, free, checking accounts, with a debit card and everything, but they pay you interest on your monthly account balance.
The interest on a checking account is usually not very much, between 0.10% and 0.25%, but for the money you’re constantly spending, like in a monthly spending account, it’s better than nothing.
High-Yield Saving accounts are a bit better; not as good as they were a year or so ago, but around 0.50% in 2021.
These interest rates fluctuate month to month, thanks to the Federal Reserve, so make sure to shop around different banks to find the best rates and best accounts for you.
If you have monies you are planning to not need for 5+ years, like retirement or your newborn’s college fund, you can invest these dollars to earn a higher rate of return than what a normal bank account would give you. Discussed more below.
I know what to look for, now how do I decide where to put my savings?
So now you know what to look for when deciding on an account, but what type of account should you use for different savings goals?
Monthly Spending
Monthly spending is things like:
- Rent
- Utilities
- Groceries
- Gas
- Regular spending
For spending like this, you should have just a plain ol’ checking account. (Ideally, free and earns interest) With a debit card, checks, and online transfer and bill pay abilities.
We personally have multiple checking accounts:
- “Deposit” account- paychecks are direct deposited into this account and then automatically distributed to our other accounts: checking, savings, investments
- “Daily spending” account- for things like gas, groceries, eating out, school needs, hair cuts, etc
- “Bills” Account- where regular monthly bills, like rent, and utilities are automatically taken out via auto-pay
- “Business” account- for business expenses (duh)
- “Investment Transfer” account- we try to put monies into our investment accounts multiple times a month: paydays, birthdays, bonuses, etc. We used to use a savings account for this but we often went over 6 transfers a month 🙂
Short Term Savings 1-5 years
Short-term savings are monies you do not need on a monthly basis but will need within the next 5 years or less.
Short-term savings should usually be kept in high-yield savings accounts. They are still FDIC insured and earn some extra interest.
Savings accounts are only able to be accessed up to 6 times a month, so make sure if you are going to need these dollars more often than that, keep them in an interest-earning checking account.
Short-term savings include things like:
- Expected Expenses- life/car/rental insurance if not paid monthly, car registration, oil change and other car or house maintenance, vet bills, etc.
- Emergency Fund- hopefully, between 3-24 months worth of expenses
- Down-Payment for a near-future home purchase
We also have multiple high-yield savings accounts:
- Expected Expenses– cars, cats, insurances, etc
- Christmas/Birthday Savings
- Vacation savings
- Emergency Fund
- Account for each kid
- Business Expected Expenses- I pay for dues and classes a few times a month for my real estate license, so I keep these expected expenses separate
Conservative investments for Short-Term Savings?
Some people choose to keep a portion of their short-term savings in conservative investments. These investments are usually made up of mostly bonds and a few stocks, to better help keep up with inflation.
This is a great option if you are “planning” to use the money in the next 5 years but don’t “need” the money in the next 5 years.
An example could be, you are planning to purchase an investment property soon but are waiting for the housing market to cool down a bit. You can still earn some investment income while you wait, but if the market crashes for a few months/years, you’re ok letting that money just ride it out.
Do not choose this option if you are going to NEED the money in the next 5 years. Keep NEED dollars in cash.
The safety of having short-term savings when you need them is more important than some missed growth.
Long Term Savings 5+ years
Long-term savings are where you can have a little bit more leeway. This is money that you won’t need for 5+ years, so you are free to take a little bit more risk with it to earn higher returns.
Long-term savings include things like:
- Retirement (401k, IRA, brokerage account)
- Young children’s college fund (529 plans)
- Dream Vacation for your 20th wedding anniversary (brokerage account)
You want your long-term savings to be invested based on your comfort level and how long you have for the money to grow.
If you are in your 20s and have 30-40 years until you plan to retire, put your retirement dollars into mainly total-stock market index funds and let them grow. They may take a few dips and turns over the years, but you have time to let the market do its thing and grow your dollars.
Someone in their late 40s or 50s will want to start investing a bit more conservatively. You’ll want to incorporate more bonds into your portfolio along with stocks, as you might not have as much time to weather the stock market’s dips and recovery, but still want to benefit from its growth.
Take Advantage of Tax-Sheltered Accounts
When investing your long-term savings, take advantage of tax-sheltered accounts as much as possible.
Retirement accounts:
- 401k or other employer sponsored plans
- IRAs (Traditional or Roth)
- Solo 401k or other accounts for entrepreneurs
College Funds:
- 529s- these used to be really strict and only allow college tuition, but in recent years they have begun to allow private school of all ages, housing, and trade-schools
Putting your long-term savings into tax-sheltered accounts can save you thousands of dollars over your lifetime, so take advantage of them!
If you’re saving for other things, like a dream vacation or early retirement (before 59 1/2 when you can access your tax-sheltered retirement accounts) open a taxable brokerage account.
Make Sure to Invest Your Investments
But the main thing to remember with investments, tax-sheltered or not, is that the account is just an account, unless you actually choose investments, your dollars will just sit there in a cash account, not growing at all.
Wrap-Up
Deciding where to put your hard-earned savings for the best growth potential, while making sure you have your money when you need it takes a bit of planning and consideration.
Make sure to think about the timeline you’re going to need your money, open the accounts you need, and get saving!
Where to Put Your Savings
- Are there any fees or hoops to jump through?
- How easy can you get to your money?
- What is the interest/return rate
- Monthly Expenses- Interest Earning Checking Account
- Short-Term Savings- under 5 years- High-yield Savings Account, Conservative Investments
- Long-Term Savings- 5+ years- Investment Funds, got for Tax-Sheltered First
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