Saving money starts with knowing how much you can set aside each month. Whether you want to grow your retirement fund or want to buy a home, take a look at your budget to determine how much you can save. Review your recurring bills like auto insurance and cable to see if there are opportunities to save even more.
Next, you have to decide where is the best place for your funds. The most common savings account options are a traditional savings account and a money market account.
What is a savings account?
A savings account is the first account most of us probably open. It’s easy and quick to find a savings account. Your local bank or credit union are great options on where to open an account. A savings account typically requires you have a minimum balance.
Using a savings account will keep you accountable for spending. It’s a great idea to sock away a little bit at a time. But don’t worry, savings accounts are liquid. If you have an emergency, you can access your money very quickly.
How do savings accounts work?
Savings accounts are backed by the FDIC (Federal Deposit Insurance Corporation) up to $250,000. So unlike a stock or bond that can lose value, a savings account is a safe savings vehicle. Though savings accounts typically pay less interest than what you will earn in money market account, they require a lower balance to open.
The money you make from a savings account is called interest, and that interest is compounded. Compound interest is calculated using the principal plus any interest already earned, and savings accounts will compound on a daily, weekly, monthly, quarterly or even yearly basis. The more often your interest compounds, the more your money grows.
Compare rates from banks and credit unions to find the best savings account.
Pros of a savings account
Save money for short-term goals and emergency purposes
Easy to access funds
Lower minimum balance requirement
What is a money market account?
Another safe and reliable place to park your funds is in a money market account (MMA). This type of account offers features of both a checking account and a savings account. An MMA typically earns higher interest than a traditional savings account, and the funds are liquid if you have an emergency. Money market accounts are FDIC insured as well, which means you are protected up to $250,000.
The difference with an MMA vs a savings account is that you have to maintain a higher balance with an MMA.
How do MMAs work?
MMAs are a liquid investment, so you can access your funds easily. If you have an emergency or a large home-improvement project, you are covered.
Be sure to review different accounts for minimum balance requirements, expenses/fees, withdrawal limits and interest rates to make sure you find the best account for you.
Pros of a money market account
Higher interest rates vs a traditional savings account
Ability to draw funds quickly and check-writing ability
Understand where you money is going and start saving more today.