Generation Z has some of the highest rates of savings—especially for retirement—more than any other recent generation. And with record-high interest rates on savings accounts, this is a great time to be saving. However, not everyone is taking advantage of these rates. In fact, 40% of 18-24 year olds have less than $500 in savings—nowhere near enough to cover a large, unexpected cost or day-to-day living expenses in the case of a lost job.
If you don’t currently have a savings account or are looking to increase your savings to meet a short- or long-term savings goal, this post is for you. From saving for small purchases and emergencies to retirement plans and buying your first home, we’ll discuss reasons for creating a savings plan, as well as the benefits of using savings over credit, and how to choose and open the right account for your specific goals. Keep reading to learn more!
Why Open a Savings Account
Everyone has their own personal reasons that motivate them to start saving and stick to a plan, and your reasons will be unique, too. But what are the common factors that make saving money at a financial institution an important part of smart money management? Here are just a few.
Your Money is Safe
Perhaps the most important reason to open a savings account at a bank or credit union is that it is a substantially safer way to save your money than simply keeping it at home. Deposit accounts at most financial institutions are federally insured, up to $250,000 per account, per account holder. While banks are insured by the FDIC, credit unions, like Palisades Federal Credit Union, are secured by the NCUA. With a savings account at a bank, you’ll never have to worry about misplacing your hard-earned money, or worse, someone stealing it.
Your Money is Easier to Save, Harder to Spend
Saving at a financial institution where you already have an account can make saving a breeze. If you have regular income, simply set up automatic transfers from your checking account, and then sit back and watch your savings accumulate. Additionally, if you receive paychecks through direct deposit, you may be able to send a portion directly to your savings account, too.
Even if your income is irregular, keeping savings in a designated account, rather than at your fingertips in your piggy bank or wallet, will make it harder to spend. Having the extra step of needing to make a withdrawal or transfer to your checking account will give you time to consider whether or not a certain purchase is worth reducing your nest egg.
Earn Interest on Your Money
Even if you keep your savings locked in a safe, that money will never grow unless you invest it. And although some checking accounts offer interest, it’s typically not going to compare to what you’ll get with a specific savings account.
Earning interest can not only make your savings grow, it can help diminish the effects of inflation. While your dollar may not go as far as it did a year or two ago, interest can make that reduction in spending power less painful.
Be Prepared for an Emergency
Whether you need to pay for an unexpected car repair or education expense, having a fund to fall back on can help you handle surprise expenses without going into debt. With today’s high interest rates for loans and credit cards, this is especially important.
So how much should you save? As we discuss in our post, Are You Prepared for a Rainy Day: How to Build an Emergency Fund, “The general rule of thumb is to have enough to cover three to six months of expenses.” But, every little bit counts: “Even having a few hundred dollars can get you out of sticky situations.”
Savings Account Can Help You Achieve Your Goals
Whether you hope to buy a house in the next few years or just go on a special vacation with family or friends, savings accounts can help you achieve those goals.
While first-time homebuyer loans can have lower down payments, you will also need to cover closing costs, which can run 3-6% of your home price. And the more money you have saved, the more lenders will see that you are responsible and able to pay back your loan, which means you’ll be more likely to be approved for a loan to begin with.
If homebuying isn’t yet on your horizon, consider starting smaller, saving for manageable goals like an expensive purchase (phones and cars make great starter goals!). Calculate the total cost of the purchase and how much you’ll have to set aside each month to pay for it, transferring that amount into your savings account till you reach your goal. By paying for your purchase upfront, you can save significantly on interest.
Lastly, don’t forget retirement. Because the earlier you start, the bigger impact compounding interest will have, do your best to save as much as you can at the start of your career. Investing $100 a month in a retirement account starting at age 25 can add up to $1 million with 12% interest. But if you wait till age 40, that same monthly savings will only be about $300,000.
Have Less Stress and More Fun
Even if you don’t have some specific savings goal, saving your extra money is an important way to build your wealth, and the more money you have in savings, earning interest, the more easily you can afford to do the things you like to do.
When you have sufficient savings, you’ll be less likely to rely on loans, which means you won’t be wasting money on unnecessary interest. If you’re saving to buy a home, you’ll turn your monthly rent payments into an investment in something you own. You’ll also enjoy the benefits of having less financial stress, whether it’s worrying about how you’ll pay for an unexpected bill or being able to retire in comfort.
How to Choose a Savings Account
If you’re opening your first savings account, the number of choices for savings accounts and savings options can seem overwhelming.
Traditional Savings Accounts
Traditional savings accounts, also called statement or simple savings accounts, are the place to start if you’re new to savings or looking for a simple vehicle to set aside funds for a rainy day or short-term goal. Simple savings accounts typically have a lower minimum balance, low opening balance, and fewer requirements and fees. For instance, our Share Savings Accounts only require a $5 deposit to open. Younger savers, who might not be making regular deposits or keep larger balances, can benefit from basic savings accounts.
High-Yield Savings Accounts
With a high-interest or high-yield savings account, you’ll earn more interest on your balance than with a traditional savings account. However, there are usually some stricter requirements affiliated with these accounts, like higher minimum balances or restrictions on how frequently you can withdraw from the account each month, making them better choices for individuals who tend to keep a higher balance or don’t need to take money out often. For more information about our high-yield accounts at Palisades, visit our Personal Savings Account page.
Money Market Accounts often offer even more interest than high-yield savings accounts, but are usually paired with a few requirements in order to earn those interest perks. Firstly, money market accounts almost always require a higher minimum balance—at Palisades, our accounts do need a balance of $2,500, though this is lower than many other institutions. Money market accounts also often reward you for even higher balances, with tiered interest rates based on the amount of money in your account. This type of account makes the most sense for a seasoned saver who is able to meet the minimum balance requirements and avoid fees.
Another benefit of money market accounts is that they also come with check-writing capabilities, allowing you to easily use your account to pay for expenses, making them great emergency savings vehicles. But you’ll need to be careful; some money market accounts (though not ours!) have limits on the number of checks you can write each month.
While you may have heard the term ‘certificates of deposit,’ before, at credit unions, we refer to this product as a ‘savings certificate’ or ‘share certificate’. These time deposit accounts allow you to save a set amount of money for a set period of time in a special account. While you won’t be able to access your funds during that term, you will receive a higher interest rate as well as a guaranteed rate of return, making them exceptionally safe and dependable savings vehicles.
It is possible to withdraw funds early if you need them, but in most cases you’ll be required to pay a penalty or will lose the interest you’ve earned. However, terms come in a range of lengths, allowing you to choose one that works for your needs. For instance, at Palisades our Certificate Accounts range from 3 months to 60 months.
Because of the set term lengths and limited accessibility, certificates aren’t great for emergency funds. But they can be a good tool to grow your nest egg, or set money aside for a future plan, like education expenses, or a vehicle or home purchase.
Individual Retirement Accounts
Long-term savings goals often require specific savings accounts to make the most of your money. Individual Retirement Accounts (IRAs) have significantly higher rates of return than most savings products, and also come with tax benefits. Traditional IRAs allow you to reduce your tax burden today. With a Roth IRA, you won’t pay taxes on your withdrawals, once you retire.
IRAs have a lot of benefits, especially for younger savers. To start, you can have an IRA on top of other retirement plans offered through a place of employment, like a 401(k). And your IRA belongs to you, not your employer, and no matter how often you change jobs over the course of your career, your IRA will remain the same—no need to roll it over into a new account and no employer vestments to lose. Lastly, if you do need to use your funds early, there are some uses that won’t get you an early withdrawal penalty, including using funds to buy your first home, for education purposes, or for the birth or adoption of a child. Visit the IRS’s Additional Tax on Early Distributions From Traditional and Roth IRAs for more information about qualifying early withdrawals.
How to Start Saving
Setting up a habit of savings isn’t always easy, but there are certain things you can do to fit it into your budget, simplify the process, and minimize the hurdles that can prevent you from regularly contributing to your savings goals.
- Choose a savings goal. Setting goals can be the motivation you need to get started saving and to stick to your plan. It’s possible to set more than one goal—and as you get more familiar with saving, this is important—but you can also start small with an easily-attainable goal that you can reach in a shorter amount of time. Basic goals can include emergency funds, paying for an expensive purchase, or saving for a down payment on your first home or car.
- Set a budget for savings. Once you’ve established a goal, it’s time to create a savings strategy to help you meet it. You’ll need to set a timeline for achieving your goal, balancing it with the amount of money you can reasonably set aside each month. This is a good time to make a monthly budget that calculates your income and expenses, including savings as an integral part.
- Open a savings account. Knowing your goal and your budget will help you choose the right account—whether it’s a traditional savings account, a high-yield savings account, or a money market account. You may also want to consider opening a CD for faster growth, now, or once you’ve accumulated a small nest egg.
- Set up automatic transfers. It can be hard to find time to get to the bank, and remembering to make in-person deposits regularly can create a barrier to savings. As we discussed earlier, setting up automatic transfers from your checking account or deposits from your paychecks can help you reach your goals on time, with ease.·
Open a Savings Account Today
With a variety of NCUA-insured savings accounts to choose from, we can help you meet your savings goals and needs—whether you’re just starting to save or looking to expand your savings goals.
Call or visit one of our branch locations in Rockland County to see what we can do for you!
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