When it comes to saving money, most people start with a basic savings account. Then, they move straight into market-based investments, such as stocks and bonds. However, before you jump into higher-risk market-based investments, there are many investment options at the credit union you should pursue first; many that offer great returns with little to no risk.
Some of these options include savings accounts, money market accounts, certificate accounts (commonly called Term Share Certificates or TSCs), and individual retirement accounts (IRAs). Let’s review these options in more detail so you can pick the one(s) that will be best for your current financial needs.
Savings Accounts
Savings accounts are your first step in saving money. Think of this option as an emergency fund account so that if an unforeseen event occurs, you have the money available to pay for any expenses. (A rule of thumb is for your emergency fund to be equal to 6 months of your current living expenses.)
There are even savings accounts designed specifically for children and teens to help get them started and to help you save for holidays and vacations.
Money Market Accounts
A money market account is another type of savings account that offers an even higher interest rate. It is another great way to save money for an emergency fund. Money market accounts are typically set up in tiers, meaning the more you deposit, the more interest you’ll earn. It’s a great way to learn to save your money regularly and build up a stable savings.
One thing to keep in mind with money market accounts is that you will have to place in a higher minimum balance. Also, it isn't like a traditional checking or savings account where you can make as many withdrawals as you like. Instead, you only are allowed six transfers or withdrawals each month. And if your balance falls below the required minimum balance, you won’t earn interest until the minimum balance is met again.
Certificate Accounts
A certificate account (commonly called a Term Share Certificate or TSC), is a timed deposit option that is different from regular savings accounts. Instead of having access to your money anytime you wish, a TSC requires that the money be kept in the account for the required term length you choose, which can range anywhere from six months to five years.
The advantage in a certificate of deposit is that you earn higher interest rates on your money the longer the money sits untouched. It’s a great tool to force yourself to save your money since you cannot use it during the designated term.
Yet there are disadvantages to a certificate account. You can get hit with a penalty for early withdrawals if you don't let the account mature. Otherwise, a certificate is ideal when you just want to sock your money away and let it build interest with low risk.
Individual Retirement Accounts
Individual Retirement Accounts (IRAs) are a kind of savings account where you can invest your money and receive special tax benefits. There are numerous IRAs that are available, including Roth and Traditional IRAs.
The biggest advantage of an IRA is that you can get tax benefits on the money. The dividends, interest, and capital gains can increase yearly without being taxed. You can place a set amount into the account each month until reaching the maximum yearly contribution amount.
Unfortunately, there are also disadvantages to an IRA. These accounts are retirement accounts and are designed so you save for the long-term. You may get hit with a strict penalty of 10% if you withdraw the money before reaching the required retirement age.
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Every person's savings situation is different. We’re here to help you make the best financial decisions for your specific goals. Stop by our branch or give us a call at 800-343-6328, and we’ll work with you one-on-one to find the right savings options for you.
Each individual’s financial situation is unique and readers are encouraged to contact the Credit Union when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.