If you’re a wise financial consumer, you have money in three places – your checking account to pay bills, your intermediate savings account for short-term goals and emergencies, and your long-term portfolio for retirement and other savings goals longer than five years. Your checking account should be minimal with only enough cushion to prevent fees, and your intermediate savings should be kept somewhere other than your checking account. You have your choice of savings instruments although some are better than others.

Statement Savings

Statement savings accounts are a step up from passbook savings accounts. In days of old, banks gave customers a passbook to keep track of deposits and balances. Now the banks send a virtual or paper statement to help customers keep track. At one time, the federal government set the interest rate that was paid on these accounts.

When the banks deregulated, the interest rate began to fall. And it kept falling until it has landed at about 1-2%. This means that money kept in a statement savings account is not keeping up with the rate of inflation and is doing very little for you. Currently low-interest statement savings accounts are the primary savings vehicle in the United States. Your money is easily accessible and insured, however.

Money Market Accounts (MMA) and Funds (MMF)

At the present time, money market account pays between 2.5-4% and a money market fund pays around 4-5%. The two sound similar, at least in name, but are actually very different forms of savings. A money market account is a savings account offered by a bank much like statement savings. These accounts pay a bit more because they require a bit more to open. The main difference between the bank money market account and the savings account is access to the funds. Generally, money market accounts allow a limited amount of checks to be drawn or funds transferred. There may also be additional fees for writing checks or dropping below a minimum balance. It may be possible to find a money market account paying 4% or higher. The Federal Deposit Insurance Corporation (FDIC) also insures these accounts.

A money market fund, on the other hand, is not a savings account in the traditional sense. It is not protected by the Federal Deposit Insurance Corporation (FDIC) because it is actually a type of investment. Money market funds are considered very safe, however. A MMF is a mutual fund where the managing bank is required to invest in high-quality, short-term investments such as loans to other government agencies or the US treasury. Rates vary, but most average around 5%.

Certificates of Deposit (CD)

A final form of short-term savings is a certificate of deposit or CD. When you purchase a CD you are tying up your money for three months to six years. The longer the investment period, the higher the rate of return you can expect to earn. It may not be wise to invest all of your savings in CDs as you must pay a penalty fee to take the money out earlier than the maturity date, but CDs can be a profitable savings vehicle you’re your short term money or in times or of uncertainty and high risk. CDs generally pay more than 4% but remember, the longer the term the higher the rate offered but you incur a certain opportunity risk if rates rise and your funds are already tied up in long term CD.

Understanding Your Savings
The interest rate advertised by the bank is most likely the annual percentage yield. The annual percentage yield (APY) is the amount you actually make with a savings account. By contrast, annual percentage rate (APR) is the rate charged on an account and takes into consideration the interest rate and fees associated with borrowing money. The difference is in the computation.

Two savings instruments (or credit cards for that matter) can have the same interest rate. But if one of the accounts is computed daily and the other monthly, the annual percentage yield can be very different indeed. The APY takes the interest earned per period and adds it to the existing balance so on the next period of interest calculations, you are earning interest on the principal pus the interest already earned. The more frequently an account is computed, the higher the yield (or the higher the interest paid.) This means you earn more with a savings account with a higher APY. When you’re shopping for savings instruments be sure to obtain the APY for all of your options from different establishments to truly compare accounts correctly. Comparing APY to the nominal interest rate will give you no insight into how much you really stand to make.

And don’t forget to include any fees. The highest yielding accounts also tend to come with a few extra fees, watch for maintenance fees or annual fees and early termination fees. If there are these fees and those fees are more than the extra yield, you would be better off with a lower interest rate and fewer fees. Only when you properly research your options will you discover the best savings vehicle for your personal situation.

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