If you’re planning to save, you might not know where to start or might be confused with several options out there. Finding the right account depends on whether your plan is short-term or long-term, how much you desire to earn, and how frequently you want to withdraw it. Let’s see which investment or saving strategy would work for you.
Ask These Questions
Each account has unique features. Knowing about them would help you choose the right savings strategy.
How Often Do You Need Withdrawals?
Accounts like certificates of deposit (CDs) and retirement accounts impose a penalty fee if you make withdrawals before a specified time. If you’re going to need cash in the near future, you cannot choose the above accounts.
The Interest Rates
Some types of accounts provide high-interest rates or potential investment income than others. You need to research to find banks that offer the best rates.
How Long Can You Wait?
Think about your ambitions and desires and how much money you need for them. You have to save depending on the amount and the time the money takes to grow. If your goal is long-term and would take more than four or five years, investing is a better option than saving.
Short-term Savings
Short-term saving goals take a year or less than a year to save. It can be for a vacation, home renovation, or even an emergency.
High-yield Savings Account
They are primarily offered only by online banks and usually offer higher interest rates than traditional banks’ savings accounts. However, the return would be lesser than savings accounts like certificates of deposit (CDs) or investment accounts. The main advantage is that you access your cash whenever you want soon.
Money Market Account (MMA)
A Money Market Account (MMA) is a savings account with some features found in checking accounts. They provide paper checks and debit cards. Even interest rates would be almost the same as high-yield savings accounts.
Cash Management Account (CMAs)
These accounts are offered mainly by brokerages and not banks. They have modest interest rates and provide few checking account features like ATM withdrawal using a debit card.
Medium-term Savings
The medium-term would be a year or more. It could be the savings of three to six months to meet the expenses of a wedding ceremony or even a down payment on a house. You should look for an account that earns some interest. However, these interest rates in the medium term don’t exceed inflation prices and would not get you extra returns.
High-yield savings account
You can use a high-yield savings account just like short-term savings goals because of their liquidity.
Certificate of deposits (CDs)
If you have a clear plan in mind, like purchasing a house two years from now, you could try a certificate of deposit (CD) that would mature before the date you have planned. This lets you earn some extra money because of the interest. However, you should not forget that you would be charged a penalty if you withdraw your cash before the end of the certificate deposits term. Some banks offer a no-penalty CD; you can choose them.
Money Market Accounts (MMAs) and Cash Management Accounts (CMAs)
Money market accounts and cash management accounts can make a good choice even for medium-term goals because they give easy access, fitting interest rates, and checking account features.
Long-term Savings
Some people may plan to save or invest long-term, like a decade or several decades. This can be retirement or your children’s college tuition fees.
Investment Account
Investing is the ideal option for long-term returns as they earn higher than other saving strategies. An account like a 401(k) or an individual retirement account (IRA) will be the most suitable option for retirement. But you should be aware that most long-term available strategies don’t allow you to withdraw cash any time and would charge penalties until investors are at least fifty-nine and a half years old. If you need to make early withdrawals, you could consider investing in a taxable investment account. These accounts never charge penalties for early withdrawal; however, you would owe capital gains taxes when you sell investments. Financial advisors recommend investing for at least five years as that would nullify stock market volatility and other market fluctuations.
529 plan
If you want to save particularly for education, you should choose 529 savings plans. They are tax-advantaged investment accounts that permit parents to save their children’s college tuition with compounding returns.
Any goal you have, keep in mind that you should save or invest so that the money grows. Simply saving would not help you as the value of the money would decrease because of inflation.
