Saving

Saving

Saving is an important component in financial planning. Whether planning for a child in college or just preparing for the unexpected, saving will help you reach your financial goals. While those with modest incomes cannot save as much as the affluent, almost all have the ability to build wealth over time. Through contributions to a workplace retirement program, home purchase, and other savings, most can accumulate six-figure assets during their working years.

Disclaimer: The material provided below in this section should be used for informational purposes only and in no way should be relied upon for financial advice. Also, note that such material is not updated regularly and some of the information may not, therefore, be current. Please be sure to consult your own financial and tax advisor to develop investment and savings strategies that work best for you.

Please visit the Practical Money Skills site to learn more about Saving.

Saving strategies

The following four Savings Strategies are commonly used by financially literate individuals.

1. Pay off high-cost debt. A good investment most borrowers can make is to pay off consumer debt with double-digit interest rates. For example, if you have a $3,000 credit card balance at 19.8 percent, and you pay the required minimum balance of 2 percent of the balance or $15, whichever is greater, it will take 39 years to pay off the loan. And you will pay more than $10,000 in interest charges.

For additional information, please see the DebtAdvice.org Web site associated with the National Foundation for Credit Counseling (NFCC).

2. Buy a home and pay off the mortgage before you retire. The largest asset of most middle-income families is their home equity. Once these families have made their last mortgage payment, they have far lower housing expenses. They also have an asset that may be borrowed on in emergencies or converted into cash through sale of the home.

For additional information, please see the Fannie Mae Foundation Home Buying Guide Web site.

3. Participate in a work-related retirement program. Many employees turn down free money from their employer by not signing up for a work-related retirement program such as a 401(k) plan. If they did participate in a proper dollar-for-dollar match, they would likely receive an annual yield of greater than 50 percent on their investment.

For additional information, please see the American Savings Education Council Web site.

4. Outside of work, save monthly through an automatic transfer from checking to savings.These savings will provide funds for emergencies, home purchase, school tuition, or even retirement. Almost all banking institutions will, on request, automatically transfer funds monthly from your checking account to a savings account, U.S. Savings Bond, or stock mutual fund. What you don't see, you will probably not miss.

For additional information, please see the U.S. Securities and Exchange Commission Web site.

The miracle of compound interest

Savings products

The following savings products are often used by those saving one to five years for a wealth-building goal such as an emergency fund, the down payment on a mortgage, or school tuition.

SAVINGS ACCOUNT (bank); SHARE ACCOUNT (credit union)

  • SafetyGovernment - insured*
  • Access to Funds - Generally immediate
  • Where to Purchase - At any bank, thrift, or credit union
  • How to Purchase - In person
  • How to Make Deposits - Through tellers, ATMs, or automatic monthly transfer from checking account
  • Other Features - At many institutions, a minimum balance is required to avoid monthly fees, but several may waive these fees for American Savers

* Accounts at some credit unions are privately insured.

CERTIFICATE OF DEPOSIT (bank); SHARE CERTIFICATE (credit union)

  • Safety - Government-insured*
  • Access to Funds - Generally immediate but interest penalty may apply
  • Where to Purchase - At any bank, thrift, or credit union
  • How to Purchase - In person or by mail
  • Other Features - Make certain financial institution will notify you when CD matures

* Accounts at some credit unions are privately insured.

U.S. SAVINGS BOND, SERIES EE

  • Safety - Government-guaranteed
  • Access to Funds - After first six months, generally immediate access but loss of three months interest may apply
  • Where to Purchase - At any bank, thrift, or credit union or from the U.S. Treasury
  • How to Purchase - In person at financial institutions or by mail from U.S. Treasury
  • How to Make Deposits - EASY SAVER program allows periodic payroll deposit or checking account deductions to purchase bonds
  • Other Features - Must cash in after 30 years or no more interest earned; face value of bond twice the purchase price (e.g., $50 bond costs $25)

U.S. SAVINGS BOND, SERIES I (with inflation protection)

  • Safety - Government-guaranteed
  • Access to Funds - After first six months, owner generally has immediate access, but loss of three months interest may apply
  • Where to Purchase - From any bank, thrift, or credit union or from the U.S. Treasury
  • How to Purchase - In person at financial institutions or by mail from U.S. Treasury
  • How to Make Deposits - EASY SAVER program allows periodic payroll deposit or checking account deductions to purchase bonds
  • Other Features - Must cash in after 30 years or no more interest earned

MONEY MARKET FUND

  • Safety - Not government-insured
  • Access to Funds - Generally immediate
  • Where to Purchase - Money market fund
  • How to Purchase - By phone with mailed check or wire transfer of funds from checking account
  • How to Make Deposits - By check or wire transfer of funds from checking account
  • Other Features - Many funds allow a few checks to be written each month

 

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