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How Much Money Should I Keep in My Savings Account?

As interest rates skyrocket, savings options that involve less risk become more popular. High-interest rates allow you to garner more money from your savings account, without the fear of losing money to high-risk stocks or mutual funds.

When you set up an automatic savings account, you are creating an emergency fund, saving up for a once-in-a-lifetime vacation, or save up for a big-ticket item like a house or a car. But where should you store your cash if you’re looking to maximize savings? There are plenty of different options to choose from, and you should do your research on which banks (and account types!) offer the best interest rates.

What Does a Savings Account Do?

Savings accounts opened through nearby banks or credit unions are the most convenient places to store your money. If you need to deposit or withdraw money, you can visit the bank or an ATM. However, money placed in a standard savings account usually doesn’t garner much interest.

At a physical, brick-and-mortar bank, expect to earn around 0.01% or 0.30% interest annually. For example, let’s imagine you have a savings account with a balance of $10,000 that earns .02% interest each year. After one year, you will have made only $2 in interest.

Different types of accounts (and different banks) carry different interest rates, but you can normally expect credit unions and physical banks to offer rock-bottom interest rates. If you have the means to keep a balance of five or six figures in your savings account, you may quality for higher rates, but this isn’t guaranteed.

However, standard savings accounts do have their bonuses. You can access your money any time through a bank or ATM. It is up to you to decide if this convenience is worth sacrificing high interest rates.

High Interest Savings Accounts

High-interest savings accounts work almost identically to traditional savings accounts. Yet, there is one big difference: high yield savings accounts offer sky-high interest rates. These accounts are typically offered by online banks, meaning you won’t have the convenience of using local banks or ATMs. High-interest savings accounts can garner up to 5% APY.

Once again, imagine you have a savings account with a balance of $10,000, but this time, it is deposited in a high yield savings account. You would earn $512 per year (assuming you earn 5% interest). Even if you only earn 1.5% interest per year, you will have made $150. This is a lot more than you’d make with a traditional savings account.

If convenience is important to you, switching over to a high-interest savings account may not be worth it. If you want to withdraw or deposit money into your account, you’ll have to put the cash in an account at another bank, then transfer it into your online account. If you’re lucky, your bank may allow you to deposit checks into your account digitally. It may take some time for these checks to clear though. Plus, if you have a problem with your account, you can’t speak to a bank representative in person.

Saving with Money Markets and Mutual Funds

If you don’t want a traditional savings account, you may want to look into money markets (MM). There are two main types of money markets. The first is money market savings accounts (MMSA). The other kinds are money market mutual funds (MMMF).

Money markets account

Money markets account usually works like any other savings accounts. However, there are two key differences. MM accounts may offer people who save with them better interest rates. The more you keep in your MM account, the higher your interest rate will be, which can be uncommon for traditional accounts. These accounts also come with check writing privileges and a debit card, but you can only withdraw money 6 times per month. All savings accounts have limits on how many times you can withdraw money each month since it is regulated by the federal government.

Money market mutual funds

Money market mutual funds are the complete opposite. They aren’t offered by a bank. Instead, they are run by private corporations. You can place money in your MMMF using a brokerage account or create a different account in conjunction with the fund company, which will allow you to invest in an MMMF. These companies invest in short-term projects and usually offer high-interest rates.

MMMFs are not insured by the FDIC, meaning that there is no way to retrieve any money you lose in these investments. Investments like that are risky in comparison to money market savings accounts and high-interest savings accounts. You also have to pay a management fee when investing in an MMMF, meaning you will not get to keep all of the money you earn through the investments. Some accounts may make 1% interest yearly. Money made through MMMFs can be taxed.

Certificates of Deposit

Certificates of deposits (oftentimes referred to as a CD) are offered by most banks. Certificates of deposits are time deposits, which means that cash must stay in the account for a certain amount of time before it is withdrawn.

Certificates of deposits can be purchased for varying amounts of time, anywhere from 1 month to 10 years. Usually, the longer you keep your money in the account, the more interest you will earn. Some banks offer additional interest if you maintain a high balance in your account. Other banks let you earn more money as time progresses.

As of May 2020, the average year-long certificate offered an interest rate of 1.65%. Five-year certificates of deposits offered an even higher interest rate of 2%. This seems like a great deal, but you have to consider how much money you need to initially invest in a certificate of deposit.

If you are someone that struggles with overspending, a certificate of deposit could be a great choice for you. While the money is in a certificate of deposit, you will not be able to withdraw it. If an emergency arises, you can remove your money, but your bank will likely enforce a penalty. This penalty will likely negate any interest you have made.

Treasuries and Savings Bonds

Savings bonds are also a popular option. The American government offers this type of savings account, and you are guaranteed to make all of your money back. Savings bonds are also time deposits, meaning that the bond will reach its maximum value at some point in the future. With savings bonds, this is usually 20 or 30 years in the future.

You earn interest on savings bonds monthly and you can cash out whenever you see fit, even if it is before the maturity date, but you won’t get quite as much as if you cashed it in on the maturity date, just like a certificate of deposit. Savings bonds can be purchased through almost any bank. You can also get them online at Treasury Direct.

American treasuries are low-risk and carry relatively high-interest rates. You can invest in T-bills and notes, and you are guaranteed to get your money back. You don’t need much money to start investing in treasures, and they can be long or short term investments. You can start investing with only $100. In May 2020, the US Department of the treasury offered a 2% interest rate on 10-year treasuries. 

What is the Right Choice for saving your money?

There is no one-size-fits-all approach to saving. It relies solely on what your savings goals are. If you need a savings account to guard yourself from overdraft fees (and want to withdraw money with ease), you will likely want to consider traditional or high-interest savings accounts. If you are planning on buying a car or house in the semi-near future, consider investing with a certificate of deposit or MMMF.

Lots of people rely on multiple savings methods to make ends meet. This lets them personalize their savings to their needs. You should always make sure that your money is working as hard as it can, no matter what savings avenue you choose.

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