The importance of saving your money has probably been drilled into your head by now. Not only is it one of the most popular pieces of parental advice — second only to the reminder to take a sweater in case it gets cold — but there’s also a cottage industry in financial articles that scold readers for not saving.
Well, message received! You have decided to start saving your money — and carrying an emergency hoodie in case of cooler temperatures.
The only problem is figuring out where exactly to stash it. (The savings, that is. The hoodie can live in your car). There are a number of considerations to keep in mind as you decide the best place to park your savings.
Here’s what you need to know:
Understand Risk Factors
According to James Bowman, host of the Gen-Z Mon-E Podcast, there are three risk factors to consider when choosing a savings vehicle:
On average, inflation is generally about 3% per year, which means $1,000 in today’s cash will only buy $970 worth of goods in one year. But inflation is not static (as you have probably noticed lately at the gas pump or grocery store), and money that is not growing during periods of high inflation will lose value even faster.
Volatility describes how stable, or sturdy, your principal (the amount of money you put into the account) is in any given savings or investment vehicle. Your money in a savings account is guaranteed by the bank and FDIC insurance up to $250,000, so there’s no volatility for a checking or savings account, but it is unlikely to grow enough to outpace inflation.
There is volatility if you were to invest your money in the stock market, but it is also more likely to experience growth. (There can also be loss when investing, or volatility.)
The liquidity of your savings can be a double-edged sword. Having money set aside in a savings account means you can access it easily in case of an emergency — but it also means the money is easy to dip into for non-emergencies as well.
Know Why You Are Saving
“Savers must find the right combination of inflation, volatility, and liquidity for their money,” he says, suggesting that “the place you stash your savings should reflect the purpose of the savings.”
For instance, an emergency fund needs to be stable and liquid, while savings intended for a future down payment needs to grow faster than inflation and be somewhat inaccessible.
Newbie savers might make the mistake of trying to maximize the return on their savings. “All of your money should not have the job to grow,” Bowman explains. “Some of your money should be growing and some should be used as insurance.”
The right savings or investment vehicle depends on what your savings needs to do for you. An emergency fund has to be stable and accessible, even if it means losing buying power to inflation over time.
“You shouldn’t put your insurance money in a volatile system,” Bowman says. “You also shouldn’t put your growth money in a low-returning vehicle.” Having a clear idea of what your savings is for can help you choose the right savings vehicle.
Evaluate Your Options
Once you know the risk factors and why you are saving, you still need to compare options. Sara Lohse, an accredited financial counselor and Director of Marketing at Brotman Media Group, recommends looking at the following aspects of each savings account or vehicle:
- Interest rate: While you’re unlikely to find rates that can outpace inflation on traditional savings accounts, some have better rates than others. “Often, online-only banks … will have higher interest rates,” Lohse says.
- Accessibility: “Basic savings accounts generally let you make withdrawals only six times per statement period,” (a statement period is usually a month), Lohse warns, “whereas Certificates of Deposit will have a timeframe where you’re not supposed to touch the money.”
- Minimum balance requirement: Accounts may require you to keep a minimum daily balance. “Make sure you can cushion the account with at least enough to keep the minimum or you can face hefty fees,” says Lohse.
- Fees: Fees can potentially hurt your savings goals. According to Lohse, “monthly maintenance fees, excess withdrawal fees, and inactivity fees are common, but can often be avoided by exceeding a minimum balance, staying within the withdrawal limit, and making deposits at least once during each statement period.”
In addition to these factors, Lohse also recommends looking at what additional tools the institution might offer. “My savings account lets me separate my money into buckets and label each one, plus set a target amount and a deadline,” she says. “This helps me visualize my progress and see exactly where my money is earmarked for, instead of seeing one lump sum and having to figure out if it can cover all of my goals.”
What Matters Most
Finding the right place for your savings is important, but it’s hardly the most vital part of being a successful saver. Bowman puts it this way: “Where you place your savings is much less important than saving money itself,” he says.
That’s because no savings vehicle can help you reach your goals if you don’t use it. You might find a perfect account with the best interest rates, the lowest fees, and the exact right level of accessibility — but it can’t save your money for you. A good habit of saving money in an imperfect account will always have better outcomes than a spotty or nonexistent savings habit with an ideal account.
The right account for you is the one that fits your needs — and one you can get in the habit of contributing to.