3/29/2013 8:07 PM ET|
Debunking myths about saving
Understanding the truth about these misconceptions could help you build better money habits.
The concept of saving is not a particularly tough one to grasp. We all know the importance of having an emergency fund for sudden large expenses and saving long-term for retirement. Execution, on the other hand, can be a bit more difficult. After all, the American personal saving rate is currently a paltry 3.6%.
There are intricacies to saving that many consumers may not consider in their plans. Here are three misconceptions that, once understood, could make your 2013 resolution to save that much easier:
1. Having a large savings balance is all that matters. The sum of what you have stashed away is undoubtedly important for providing clear benchmarks along the way towards savings goals. However, it's not the only thing you should be concerned about. The interest rate you're earning on that balance is also a crucial part to saving money.
Interest is the primary reason for depositing cash into savings rather than a checking account or stowing it under the mattress. Every effort-free dollar earned via interest is a dollar you won't have to earn the hard way: working. Plus, the effect is compounded the longer you leave the money set aside.
So when shopping for a new bank, the yields they offer should be a major factor to consider. Rates these days are shockingly low, with nationwide average yields below 0.1% for basic savings, and just above 0.8% for five-year certificates of deposit. Hardly any are keeping up with inflation, so to not seek the best-paying account means you'll be losing money each year in real terms. Even those who are happy with their savings rate at the moment should be actively on the lookout for future rate cuts.
2. CDs are too risky thanks to early withdraw penalization. Certificates of deposit are indeed a much longer-term savings option, as they require you hold the account without withdrawals for a specified period of time. Early withdrawal will almost always result in some sort of penalty, but if you're able to find a CD with a deserving yield, this potential penalty may pale in comparison to your earnings.
One example is the five-year CD at Patelco Credit Union in California. This account earns 1.5% APY -- well above national averages -- and includes an early withdrawal penalty of 180 days of interest (or the total interest earned, if that amount is less). This means that, should you find yourself needing to withdraw at year four instead of year five, you will still have earned significant interest (with an adjusted APY of about 1.3%). Such penalties can be more or less severe, however, so make sure to verify with your bank or credit union before opening a new CD.
Some banks also offer special CD options for seniors, who may be concerned about medical or other unexpected expenses. For example, First State Bank in Indiana offers a Senior Saver CD, which allows for early withdrawals of up to half of the original balance without fees or penalties.
All this said, you should never choose a CD with the intent of withdrawing early. Those uncertain about their need to access the extra funds in a pinch would be better off with another account option like a savings or money market account, or a shorter-term CD.
3. Every spare penny should go directly into a savings account. You may think you're ahead of the game by dutifully stashing away the remainder of your monthly paycheck into a savings account, but it can actually put you at risk for bank fees. The United States Federal Reserve regulates how various types of bank accounts are categorized. One specification that directly affects most consumers is the monthly withdrawal limit on savings and money market accounts. The Fed allows at maximum six withdrawals per month from these types of accounts, with additional withdrawals incurring a fee. Typically, this fee is somewhere around $10, which could easily wipe out a chunk of interest earnings.
What this means is using your savings account like a checking account, transferring money out whenever you need it, is risky business. Instead, you should maintain a reasonable balance in a checking account (allowing unlimited withdrawals) to cover regular monthly spending plus some extra for unexpected expenses. The rest can -- and should -- be stored in an interest-bearing account.
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Everyone knows that they should put away 6 months worth of expenses away into savings but that isn't realistic for most people. I believe you should have a savings goal and set mini goals first. If you only have 20.00 every paycheck to put away, that is ok. Build it up from there. When you get a raise from your job, look at your budget and increase your savings because you are already used to living on the lower rate, you won't miss the money. You will be surprised how quickly your savings can increase.
The hardest part is asking yourself "do i need this or want this?". If you really want to save, keep this in mind when you are shopping. For each thing you decide you don't need and don't purchase, look at the price and put a few dollars in your savings. This will reward you for making a great decision to stick to your savings plan and help you get excited about saving.
I also do some part time work on the side. It isn't much but when I receive payment for that job, I get a roll of quarters and put them in my piggy bank aka "vacation fund". That way I am less inclined to spend the extra money because I don't want to dig in my piggy bank for money. Keep piggy bank hidden too because this will keep you from wanting to dip in it when there is a urge to purchase something unnecessary.
Under FDIC Regulation D, certain withdrawal types are limited to 6 per calendar month for savings and money market accounts. This is because these types of accounts are not intended to be transactional accounts (i.e. checking account). The following withdrawal types are UNLIMITED:
in‐person withdrawals & transfers (performed with a teller at a bank), ATM withdrawals or transfers, withdrawals made through the mail, & withdrawals made for the purpose of paying a loan at the same institution. The following withdrawal transaction types, or any combination thereof, are LIMITED to 6 per calendar month: electronic or preauthorized debits (ACH), ATM Card/Debit Card point‐of‐sale purchases & withdrawals, online banking transfers & withdrawals telebank transfers & withdrawals, and withdrawal/transfer requests made via telephone to a customer service representative. If your account exceeds this Federal withdrawal/transfer limitation, you will be accessed a excessive activity fee, usually around $20. If this limitation is exceeded 3 times within any 12 month period, your account is required under Federal regulation to be closed.
Hardly any are keeping up with inflation, so to not seek the best-paying account means you'll be losing money each year in real terms.
Correction; none are even coming close to keeping up with inflation, especially after you pay taxes on the interest. The difference between 0.1% and 0.8% is insignificant compared to the real economic cost of inflation. Thanks to Federal Reserve policies of bailing out the big banks first and foremost, saving has become a choice between the lesser of evils. All attempts to use these banks for saving will reduce the purchasing power of your money to zero over the long run.
...if the economy is in such good shape, why have I had to decrease the money I put into my savings just to pay the bills???
I put $2500 into an IRA in 1983. (Before I had a 401K program at work) At the time, it was with Coast Federal Savings and Loan. They were subsequently bought by Home Savings of America, and finally acquired by Chase.
From 1983 to 2010, my money "grew" to $5500, a whopping 1.3% annually compounded interest.
Then, beginning in 2011, Chase started paying me $20 per year interest, but charging $30 per year in account maintenance fees. (I'm rolling it over to my 401K).
When I finally use the money in retirement, I'll get to pay income tax on it. That's one hell of a system for us regular folk.
I like how the second paragraph regards savers as "consumers". All do consume, but we need to look at life from a little different angle. What is our individual end results and how to get there with the tools that we have or can go get. We will do a lot of consuming on the way, but we are building towards something. Many of us are too short-sighted to be working towards any end, and thus do merely consume and hope it works out (kids, government, luck, anything else with poor success rates).
With that in mind, the savings for emergencies can be viewed as self-insurance. Who cares about the rate of return for that and just count some loss due to inflation as your cost of insurance. You just want to have that $10k, 20k, or whatever you need in your situation, available if Murphy knocks at your door.
The rest of your money saved needs to be put to work somewhere that you feel comfortable. CD's and savings accounts are not going to provide a retirement that is very appealing. Thus, you have to build towards other avenues of wealth creation with a financial advisor AND your own study.
That right saving is good credit bad-Pay attention Washington credit bad, saving good.
Greenspan screwed us all when the economy went from savings based to credit based. Time to get savings rate up to 4% or at least to the real inflation rate.
Or, IF YOU CAN PAY THE FULL MONTHLY BALANCE, use your credit card, and pay your credit card from your savings account. That way even if there's a number of withdrawals limit, you lump what would otherwise have been several withdrawals throughout the month into one withdrawal. My credit union allows unlimited manual transfers from savings to checking, and 6 free per month if I forget to do the manual transfer. All of my credit cards, and some of my vendors who don't make it easy to use credit cards, will allow online payment from my credit union, optionally from checking or savings.
Bernanke and Obama are the best in their respective fields.Obama has turned the economy
around and Bernanke is best.Look at all the money we`re make.Only a complete idiot would fault
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