Whether you invest in the stock market or not, bank accounts are a vital investment and savings vehicle. No matter how much or little money you have, everyone needs to set aside money that is guaranteed to be there when you need it. Savings in a bank are not considered a “sexy” investment choice and you will not become rich with your money stashed there. However, we all need the protection they offer should something happen and you need cash immediately.
Below, I will discuss the three types of accounts that I recommend as well as the strategy you may use to invest your money.
The checking account is the most elementary of bank accounts. It will offer a very low interest rate (if at all) and the main purpose of your checking account is to use it as a “lobby”. This is where your income comes in and expenses go out.
Have your paycheck deposited to this account. You may pay all of your expenses from this account (i.e., writing checks, paying bills, withdrawing cash, etc.). If any money remains (hopefully there is at least some), transfer those funds to a linked savings account.
Linked accounts are two or more separate accounts that are linked together because those accounts have the same owner at the same financial institution (bank). You create a link between accounts to view all of your accounts together and easily transfer money between them.
*Note: Make sure to always keep enough money in your checking account to cover one month’s worth of bills plus a few hundred dollars. The extra few hundred dollars will prevent overdraft fees and/or bounced checks.
This account will be your middle ground. Whatever is left over in your checking account after paying your bills for the month, put into a high-yield savings account. In the current financial market you can expect to receive an interest rate around 2% APY — check for here for banks with the highest savings rate.
Make sure to choose the highest yielding account that suits your needs.
Certificate of Deposit (CD)
A certificate of deposit is different from a savings account in that the CD has a specific, fixed term (generally varying from 3 months to 5 years), and a fixed rate. The money is locked in that account for the given period at the end of which you may renew the CD or withdraw your initial funds and the interest accrued.
Keep in mind, should you need to pull your money out before your CD comes due, there is a penalty. The penalty will usually be about 30-35% of the total interest to be owned for the duration of the CD.
Interest rates are close to all-time lows. You will be hard pressed to find a rate above 2%. However, rates are always fluctuating and the trend should be for rates to go up from here. For that reason, my recommendation is to choose a 6-month CD. The 6-month CD is a good choice because it is a nice trade off between a short term and decent interest rate.
You will want to split your CD fund into three portions. A third should be invested now into a 6 month CD. In two months, take another third and buy another 6 month CD at the highest possible rate. In another two months, invest the remaining fund into a third CD. This concept is called a CD ladder and allows you to have one third of your funds becoming fully liquid every two months and allows you to continuously capture increasing interest rates.
Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.