Managing Money:
Building Savings
Where to Save
Now that you know the benefits of saving and how your money can grow, let's look at different savings and investment options. Most people save money in a bank savings account or by purchasing investments. In a savings account, you make money by earning interest. The bank pays you interest for borrowing your money. A bank savings account ensures your money is safe and you can access your money.
Savings in a financial institution are generally insured up to $100,000 by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Association (NCUA). That means if your financial institution goes out of business, and it can't pay your money, the FDIC or NCUA will make sure you get your money.
Below is a review of the types of savings products available at most banks.
Statement savings account
A statement savings account is an account that earns interest. If you
have a statement savings account, you will usually receive a quarterly
statement that lists all of your transactions (withdrawals, deposits,
fees and interest earned).
Passbook savings accounts
Passbook savings are similar to statement savings accounts. The
difference is the record keeping. Instead of receiving a quarterly
statement, all transactions are recorded in a passbook. You have to take
your passbook to the bank when making transactions. The teller will
update your account information when you go to the bank.
Club account
A club account is a type of savings account you join to save money for a
special reason, such as holidays or family vacations. Club accounts
usually require you to make regular deposits.
Money market accounts
A money market account is one that usually pays a higher rate of
interest than a regular savings account. Money market accounts usually
require a higher minimum balance to earn interest, but they also pay
higher rates for higher balances.
Certificates of deposit (CDs)
CDs are accounts where you leave your money for a set period of time,
such as six months, one, two or five years, called a term. You usually
earn a higher rate of interest than in a regular savings account. The
longer you promise to keep your money in a CD, the higher the interest
rate. Be sure to think about your cash needs before opening a CD because
you will pay a penalty if you withdraw your money early.
Difference between types of accounts
- Statement savings and passbook savings accounts are similar. They both earn interest. The difference is in the record keeping.
- Club accounts are for saving for a specific purpose, such as a vacation or a holiday.
- CDs and Money Market accounts generally earn higher interest rates and require higher minimum balances. CDs are held for a fixed term. This means you cannot make deposits or withdrawals during the term. Money Market accounts do not have a fixed term. You can make deposits and withdrawals.
Always check your records and statements for accuracy. Banks are not perfect and can make mistakes.
Section 529 Plan
A Section 529 Plan is a prepaid savings program for higher education. Any person can set up a plan for a child pursuing higher education. The money grows tax-deferred and is taxed at the child's rate when withdrawn for educational purposes. The donor may have state income tax breaks. The savings can be applied to any college in any state. Many plans can be started with only $25 a month. More information about state tuition programs can be found at http://www.irs.gov.
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