Part of your financial planning should be to set up some form of savings. This is money which is readily available for use in an emergency or as an alternative to using credit for large purchases. Banks and other financial institutions offer a range of products that you can use as savings vehicles. The best choice depends on your goals for the money you are saving.
Bank Savings Accounts
A bank savings account is the most liquid type of savings vehicle. With a savings account you can make as many deposits or withdrawals as you wish. Link a savings account to your checking account for easy access to the money. Banks also offer money market accounts, which are similar to savings accounts but may limit the number of withdrawals you can make in a month. Both savings and money market accounts earn interest. The rates earned is set by the bank and are usually the lowest yielding products offered by banks. A savings account can be opened with an initial deposit of $100 or less.
Certificates of Deposit
Certificates of deposit are bank offered term savings instruments. A CD pays a set rate of interest for a fixed period of time. Certificate terms typically range from 30 days to five years. A CD is purchased with an initial deposit amount and no additional money can be added during the term of the certificate. If you withdraw money from a CD before the maturity date, the bank will charge an interest penalty. CDs earn higher rates of interest than what is paid on savings or money market accounts. Bank accounts such as savings accounts, money market accounts and certificates of deposit are all covered by Federal Deposit Insurance Corp. insurance against loss if the bank goes under.
Savings bonds are savings certificates sold by the U.S. Department of the Treasury. The Treasury issues two types of bonds -- series EE bonds pay a fixed rate of interest and series I bonds pay interest which is adjusted for the rate of inflation. Savings bonds can be purchased with as little as $25 up to a $5,000 maximum. Series EE and I bonds can be cashed in anytime after one year. However, bonds redeemed in the first five years after purchase with incur an interest penalty. The Treasury is phasing out the sales of paper savings bonds. Purchase bonds in electronic form through an account on the TreasuryDirect.gov website.
Individual Retirement Accounts
View an individual retirement account as a wrapper providing tax-advantaged benefits for whatever type of savings or investment security is placed inside the wrapper. An IRA can be set up using a money market account, certificate of deposit, mutual fund or stock brokerage account. No matter which type of savings or investment product you use inside an IRA, the IRA should be considered as a long term investment account. IRA rules require the payment of significant tax penalties if money is withdrawn before age 59 1/2.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.