It’s all over the news: Americans are spending less, stashing away more. The “New Frugality” is this year’s black. If you are among the many who are dedicating more of their income to savings, are you putting that cash in the most appropriate place(s)?
Before you choose a savings product or mix, know your needs—that’ll help you determine the saving tools that will work best for you:
Which is more important: accessibility or interest?
If you may need your money in a hurry, perhaps committing to a long-term CD isn’t the best decision right now. Consider a short-term (6 month) CD or perhaps a money market deposit account. With the money market account, you’ll earn more interest than with a savings account, but you’ll keep considerable flexibility. You can make up to six withdrawals a month with no penalty, as long as you stay above the minimum balance requirement for your money market account.
What am I saving for: mortgage down payment, retirement, next summer’s vacation?
If you’re saving for the near future (new car, nice vacation, kitchen remodel), a short-term CD might give you the best return. Time it right, and your money will be available, without penalty, when you’re ready to spend it. And you’ll have earned interest in the meantime.
If your goal is a little further out (i.e. mortgage down payment), consider a longer-term CD. Generally, the longer you agree to leave your money in a CD, the higher your rate of interest. And many long-term CDs, like GHCU’s 12- and 24-month CDs, allow for a one-time bump-up if interest rates go up during the term of your CD. Laddering CDs (staggering multiple CDs and/or investing in CDs of varying term lengths so they mature at different times) is one way to keep at least some of your savings liquid while still earning the higher rates.
If your goal is way out there (retirement), then an IRA may work best. You can continue to contribute $5000 a year ($6000 if you’re 50 or older) until you’re 70½ for a traditional IRA or indefinitely as long as you have an income for a Roth IRA.* Depending on the type of IRA you choose, you can reduce your taxable income now (Traditional) or avoid paying tax on the income later (Roth). One caveat: there are substantial penalties for withdrawing money from your Traditional IRA before you reach the age of 59½, so once the money is in, plan on leaving it there. However, IRAs typically earn higher rates of interest than other deposit products, so if you can afford to wait, you could be richer in the long run.
*Restrictions apply. Consult your financial advisor for IRA eligibility information.