You don't need to save money for just one goal. You have lots of savings' goals that you're aspiring to reach - some sooner than later. In the same vein, you don't need a single savings account. You need to get separate savings accounts to match your separate savings goals.
Read ahead to find out which types of savings accounts are the best matches for your savings goals.
The Savings Goal: An Emergency Fund
An emergency fund is an essential savings goal that everyone should have. It's a simple safety net you can rely on when you're hit with an urgent and unanticipated expense. Instead of using money from your checking account and potentially disrupting your budget for the remainder of the month, you can withdraw the necessary savings from your emergency fund to pay off the expense right away.
Your emergency fund belongs in a savings account that is easily accessible. You don't want to put it in an account like a Certificate of Deposit (CD), where your funds are locked away for a set period. If there's an urgent expense, you might not be able to access your savings until your account has fully matured-at least, not without paying an early withdrawal penalty.
When your savings are inaccessible, you might have to consider an alternative payment method to get out of an emergency. A personal line of credit loan is one of the flexible ways to borrow online that's potentially available to you. With an approved line of credit loan, you could use borrowed funds to cover your urgent expense in a short amount of time. Once the issue is resolved, you could commit to a standard loan repayment plan through a monthly billing cycle. It's that simple.
So, which savings account should you use?
The best account for this savings goal is a high-yield savings account. A high-yield savings account is very accessible. You can make a withdrawal or transfer from your account at any time, which is an extremely convenient feature for emergency funds. The account may have a withdrawal/transfer limit per month to dissuade you from shaving down your savings too quickly. Once you reach that limit, you can still access your funds, but you will be charged a small fee for every additional withdrawal or transfer.
Another benefit that comes with high-yield savings accounts is the annual percentage yield. As the name indicates, this type of account comes with a high APY in comparison to a standard savings account. You can expect to get an APY between 2-5%. This will give your emergency savings a boost with the help of compounding interest.
The Savings Goal: Retirement
Of course, you want to put away a comfortable nest egg for your retirement. You want to have plenty of savings available so that you can maintain your lifestyle when you're no longer working the 9-to-5 grind.
So, which savings account should you use?
For this purpose, you should use an individual retirement account (IRA). An IRA is a tax-advantaged investment account specifically designed for retirement savings. Through this account, you get to make a collection of investments, which will help your contributions grow over time. This gives you a better chance of building up a comfortable nest egg for your future.
You can choose between two types of IRAs: a traditional IRA and a Roth IRA. A traditional IRA offers you tax benefits right off the bat. Your contributions will not be taxed - your future withdrawals will be. It's important to consider that you will likely be in a lower tax bracket in your retirement years, so your withdrawals may be taxed at a lower rate than your current income.
If you'd rather deal with the tax benefits later, you should open a RothIRA. With a Roth IRA, your contributions are taxed, which allows you to make tax-free withdrawals when you're in retirement. It will be one less thing to worry about.
What if you have a 401(k)?
An IRA is a great option, even when you already have a 401(k) plan through your workplace. If you ever max out your contributions in your 401(k), you can still put away funds for your retirement-just add the remainder to your IRA!
An IRA is also a great backup plan to have in case you ever have to leave your job. You can rollover those 401(k) savings into your IRA without facing a penalty. Those savings will continue to grow no matter what your employment status is.
The Savings Goal: Future Big Expense
You're planning on covering a major purchase in the future, like a brand-new car or a substantial home improvement. Your deadline isn't as far away as your retirement years, but it's not too soon either. You're hoping to save up enough to make the purchase in the next five years or so.
So, which savings account should you use?
A Certificate of Deposit (CD) is an excellent option for this savings goal. A CD has a high annual percentage yield (APY), so you know that your savings will see some growth in the account. A CD locks away your funds for a chosen term (for example, 2 years), so you'll be less tempted to make unnecessary withdrawals from your savings. Most CDs come with early withdrawal penalties to dissuade you from making withdrawals before the accounts mature, which is beneficial for this type of savings goal. You won't need to access those savings for a few years.
To make the most of this type of savings account, you should consider divvying up your funds in a CD ladder. This strategy could help yield better returns.
Choose the best savings account for your savings goal. You'll be sure to reach your goal much faster!
