Money & Banking
Topic 1: Emergency Savings Account
You could get saddled with unexpected expenses at almost any time. So you should aim to have at least 3 to 6 months of income in the bank for those unpredictable times.
One simple way to build a nice nest egg with little effort: Set up an automatic funds transfer from your checking to your savings account with your financial institution.
Saving $300 per month at an interest rate of just over 2% for the next three years will result in a savings of $11,140.68.
See table below:
| Year | Ending balance with $300/mo contributions |
|---|---|
| 0 | $3,635.19 |
| 1 | $7,348.19 |
| 2 | $11,140.68 |
Topic 2: Money Markets
Opening a money market account is another great savings tool. With this account, you can earn higher interest rates on higher balances. The funds placed in a money market are liquid and are as accessible as cash. Most money markets also have the convenience of funds transfers between various accounts, ATM access and limited check writing privileges.
There’s usually a minimum amount required to open the account as well as a minimum daily balance to avoid account maintenance fees. Check with your financial institution concerning their account requirements.
Topic 3: Certificate of Deposit
Certificates of Deposit (CDs) provide higher interest rates than savings accounts. CDs are time deposits that have maturity dates and fixed interest rates. Interest is compounded daily and credited monthly. CDs are usually issued by commercial banks and are insured by the FDIC up to $250,000.
The term of a CD generally ranges from one month to five years; however, some institutions have short-term CDs beginning at just seven days so customers can earn a predictable interest but still have greater access to their money. Funds withdrawn from the CD prior to its maturity date will result in a penalty charge.
Topic 4: Savings Bonds
U.S. savings bonds are debt securities that are ideal for the risk-averse investor. They are backed by the full faith and credit of the U.S. federal government, making them practically risk free.
If you’re seeking a safer place to invest your funds and earn regular interest, then a savings bond may be for you. Interest paid on these bonds are exempt from state and local income taxes; however, savings bonds are non-negotiable and cannot be easily transferred. Savings bonds can be purchased from commercial banks.
Here are two examples of U.S. savings bonds:
1.) Series EE U.S. Savings Bonds can be used to finance education or supplement retirement income. The minimum term of ownership for an EE bond is one year, the interest-earning period is 30 years.
You can cash Series EE bonds anytime after 12 months; however, you will face early penalties if you redeem the savings bond prior to five years. This penalty is a loss of the three most recent months’ interest.
As per the Treasury Department, interest earnings are exempt from state and local income taxes, but are subject to federal income taxes or federal, state and local estate, inheritance, gift, and other excise taxes.
Series EE bonds are available in both electronic and paper form. Interest compounds semiannually for 30 years.
2.) Series I U.S. Savings Bonds (“I Bonds”) are similar to regular savings bonds, except its earnings rate is a combination of two separate rates: a fixed rate and an inflation rate. The fixed rate assigned to your bond remains unchanged for the life of the bond (30 years). The inflation rate, which is announced each May and November, is based on changes in inflation using the Consumer Price Index for all urban consumers. The inflation rate is combined with the fixed rate to determine the earning rate of the bond every six months, which is also known as the Composite Earnings Rate.
Similar to the Series EE bonds, I Bonds can be redeemed anytime after a 12-month holding period; however, by doing so you will forfeit the three most recent months’ interest.
For more information on both of these savings bonds, please visit www.savingsbonds.gov, the U.S. Department of Treasury’s “TreasuryDirect” website.
Once a month, sit down with statements from your accounts and decide if you need to rebalance. If you do, make a note. If not, you’re done.
