One of the keys to financial freedom is developing a habit of saving. It sounds really basic, but many people have trouble with this, and many just don’t know how to start. Here is an overview of how you can get started with savings accounts. The article will cover types of savings accounts, how to open one, and various alternatives that you can choose from.
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There are different kinds of savings accounts. One of the main considerations is the yield you can get on your money. The bank pays you interest — expressed as annual percentage yield (APY) — since the money you deposit is used to fund loans out to others. Rates are influenced by the Fed Funds Rate, and right now, most cash products have low yields, since the Fed rate remains incredibly low. When the Fed begins raising rates, yields on savings accounts should head higher as well. Of course, the bank loans out the money at a significantly higher rate than you are earning, so it makes a profit.
The type of account you choose can influence the returns you get for your money. The main types of savings accounts are as follows:
In addition to minimum requirements that some banks might have, it is also important to note that there are also rule governing how many withdrawals you can take from a savings account each month. Because it is a savings account, you might be restricted to between four and six withdrawals every month.
Opening a savings account is fairly straightforward in most cases. You must be 18 to open an account only in your name, and minors should have a legal guardian to be a secondary on their accounts.
You will need a form of identification, and this may include a tax identification number or Social Security Number (especially for online accounts). You will need to offer your home address and mailing address, along with your phone number. Some banks may require that you set up a checking account along with your savings account. Additionally, you might be asked questions about what you plan to do with the money — especially if it’s a significant amount — as required in some situations by the USA PATRIOT Act.
Before you open an account, you need to make sure that your financial institution of choice is FDIC insured. Also, note that, unless things change, the protected account limit goes from $250,000 back down to $100,000 on January 1, 2014. Watch how much goes into your account.
If you are not satisfied with the yields offered by the savings accounts, there are alternatives. You can look for a rewards checking account at a local financial institution, which can offer up to 5% yield, depending on how much you have in your account. You can also create a CD ladder to help increase your yields. Another option is some sort of money market fund or a Ginnie Mae fund. However, these funds are not FDIC insured, and there is a chance (though slim) that you could lose your money. Note that these types of alternatives to savings accounts may have limits on liquidity and charge penalties for withdrawals.
Here are some more alternative options to a savings account.