Why Do You Need an Emergency Fund?
- Job loss or unemployment
- Medical or dental bills
- Home repairs
Katherine Pomerantz, owner of The Bookkeeping Artist, an accounting and financial strategy firm for small businesses and entrepreneurs, knows how easy it is to get stuck in a financial rut. While putting your finances on autopilot is a great way to relieve the pressure of managing bills, paying off debt and saving for the future, it’s possible to automate your finances so much that you miss out on new opportunities to make your money work harder for you. Pomerantz says plenty of her clients use a savings account, for example, but she likes to help them look for ways to “double down on growing their income.”
Could you also benefit from taking a fresh look at your finances? Maybe you’ve been putting money in the same types of bank accounts for years, but haven’t checked how much you’re earning since interest rates are on the rise. Or maybe you’ve increased your earning potential (congrats!) but haven’t adjusted your approach to saving accordingly. Your savings diligence is admirable, but it might be time to take stock of your financial strategy to see if there are other types of bank accounts you could use to maximize your money.
Ask yourself: Where is my money? Where should I keep my money? And, where should I keep my savings? As you review your answers to these questions, and think about moving your hard-earned dollars to different types of bank accounts, here are a few options to consider:
Most people use a checking account because it’s an easy place to store money, pay bills and make small purchases. If a checking account (and debit card) is part of your regular financial routine, you may want to find an account that rewards you for using the account. Whether a bank pays interest on your balance or provides cash back on your debit card purchases, the benefit of a rewards checking account is that it lets you earn a little extra on the transactions you’re already making on a daily basis.
But choose carefully. Some types of bank accounts tie their rewards to high minimum balances, charge a monthly fee or limit rewards to transactions that require a signature. Be sure you know the requirements and, when asking yourself where should I keep my money, also ask yourself whether you can meet any requirements on a regular basis. Discover Cashback Checking® allows you to earn 1% cash back on up to $3,000 in qualifying debit card purchases each month and has no monthly fees or monthly balance requirements.1
A savings account is a good place for your emergency fund because the money can be easily accessed when you need it.2 Interest rates, however, can be meager. Once you’ve saved enough to cover your immediate emergency fund needs, it’s time to ask yourself: Where should I keep my savings?
“I like that [my online savings account] is at a separate bank from where I do my traditional banking because it makes it a little bit less tempting to use the money when it’s not actually an emergency.”
While interest rates are changing rapidly, online savings accounts may help you earn a better return. They’re similar to the accounts offered by traditional brick-and-mortar banks, but because online banks have lower overhead, they often offer higher rates. You may also be able to find accounts, like the Discover Online Savings Account, that have no monthly fees for maintenance or balance requirements. This means your savings can grow more quickly.
Emilie Lima Burke, a startup consultant and blogger at Burke Does, uses an online savings account because of the higher interest rate.
“I like that mine is at a separate bank from where I do my traditional banking,” Burke says, “because it makes it a little bit less tempting to use the money when it’s not actually an emergency.”
When comparing types of bank accounts, consumers may choose to save with a money market account if they find one with a competitive interest rate and enjoy the flexibility of withdrawing money when needed (notwithstanding typical limits on the number of monthly withdrawals allowed from a money market account). Money market accounts can also be enticing when they offer check writing and debit card access.2 If you’re just parking your money in a money market account and don’t actually need to make withdrawals, you may be able to earn more with a CD.
With a CD, you agree to leave your money in the bank for a set term. Typically, the longer the deposit period, the higher the interest rate. Chelsea Brennan, an investment professional and blogger at Mama Fish Saves, says the benefit of saving for shorter-term goals with a CD is that your money is more likely to remain committed to its purpose. Alternatively, when you can dip into the funds easily, as with a money market account (and some other types of bank accounts), “this only makes it harder to reach your ultimate goal,” she says.
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If the answer to where should I keep my savings leads you to open a certificate of deposit, note that you’ll be charged an early withdrawal penalty if you take out your money before the CD maturity date. You may want to avoid putting your money in a CD if there’s a chance you’ll need it to cover an emergency before it matures.
An employer-sponsored retirement plan is an excellent workplace perk, especially if your employer provides a matching contribution. If you want to ramp up your retirement savings, you could consider contributing money to both a 401(k) and an IRA.
Opening a Roth IRA can be a way to diversify your retirement savings and create a tax-free stream of income for later in life, since distributions are tax-free in retirement. However, as you consider where should I keep my savings, it’s important to know that contributions to a Roth IRA are limited by income, regardless of whether you participate in other retirement plans. Contributions to a traditional IRA are tax-deferred now, but taxable in retirement.
Pomerantz, the owner of The Bookkeeping Artist, works with a married couple who is using an IRA to save for a home down payment. Normally, withdrawing money from an IRA before the age of 59½ means paying a 10 percent additional tax penalty, according to the IRS. But there is an exception if the money is being used to buy or build your first home.
Pomerantz says her clients already have retirement savings in employer-sponsored accounts. They were trying to save for a down payment for their first home, but kept dipping into their savings account for other purchases.
“They wanted to open an entirely separate account that they couldn’t withdraw from whenever they wanted,” Pomerantz says. “That’s when they thought of opening an IRA. Their savings grew exponentially,” she says.
If it’s been a while since you asked yourself where should I keep my money, it might be time to mix it up. Whether you want to keep your money accessible, or save it and let it grow, there are several types of bank accounts that can help you reach your financial goals. Whichever mix of accounts you choose, make sure to regularly check in and assess that your financial setup is aligned with your short- and long-term goals.
1 ATM transactions, the purchase of money orders or cash-equivalents, cash over portions of point-of-sale transactions, and Peer-to-Peer (P2P) payments are not eligible for cashback rewards. In addition, purchases made using third-party payment accounts (services such as Venmo® and PayPalTM, who also provide P2P payments) may not be eligible for cashback rewards.
2 Federal law limits the number of certain types of withdrawals and transfers from an Online Savings Account or Money Market Account to a combined total of six per calendar month per account. There is no limit on the number of withdrawals by Official Check mailed to you or for Money Market Accounts by ATM. If you exceed these transaction limitations during any calendar month we may assess a per item Excessive Withdrawal Fee or refuse to pay each transaction in excess of the limitations. If you exceed these limits on more than an occasional basis, we reserve the right to close your account.
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1 Study by T. Rowe Price Retirement Plan Services.