Savings Account 101 and the Emergency Fund

I believe that when it comes to learning it is important to understand the “why?” and the “how?” It’s easy to tell someone “why” they should do something, but it’s something different to help them understand “how” to get from where they are now to where they want to be. Below is just an introduction to a few important financial terms and some suggestions on how to get started in opening a savings account (and saving money!)

Savings account: this is an account held by a banking institution that gives you high security with a low interest rate. Savings accounts are what we finance nerds call “liquid” which basically means it can turn into cash quickly. This is a GREAT place to have your emergency fund. Please note you will NOT get rich off of the interest you make here. This is simply an account to hold money you put aside for a rainy day (emergency fund). You are saving, not investing. There is a difference!

I can’t even begin to tell you the many avenues you can take in opening a savings account. I would suggest that you DO NOT have it connected to a checking account as this will make it too tempting to fund those Steve Madden shoes that are on sale and are now an “emergency”. As I mentioned before, a savings account won’t have a very high interest rate but if you go to http://www.bankrate.com/ and click on “compare rates” at the top left corner, you will get a list of banks that offer the highest interest rate available. Please be aware of the following:

• MONTHLY FEES!!- read the fine print. You don’t need a savings account that is going the nickel and dime you.
• APY and APR- there’s actually a difference between the two (bet you didn’t know that!!). APY (annual percentage yield) and APR (annual percentage rate) are often confused as one in the same. I’m here to expose the TRUTH!! APY is generally the number quoted when you’re looking for a savings account. It’s the number that takes into account compounding (or interest added to the principal). The APR number does not take into account compound interest. Banks want to look their best for you so if you’re shopping for a savings account they’ll most likely quote you the APY number. If you’re shopping for a loan, the APR number is what they will most likely use. For now, I’ll be happy if you are just made aware that there is a difference between the two. Ok, moving on.
• Minimum balance: Some banks require you to have a minimum balance to start an account. If you go to ing direct (website www.ingdirect.com/), and click on “open an account” at the left hand side, you can open an account with no minimum balance, and no fees. I’ve been with this institution for years and know they make saving easy. No, I’m not getting paid by them to say that I just speak from experience. Just for yourself. You can have an automatic deposit set up where money can be directly transferred into this account from your paycheck. Make it automatic and don’t rely on your memory to save weekly. Let the bank remember for you and MAKE IT AUTOMATIC!! Set it up as a direct deposit from your checking to you savings. I guarantee this is a great way to fund the emergency fund!
• FDIC Insured: this is important. It stands for Federal Deposit Insurance Corporation and it acts as insurance in case the bank goes under. You want to be sure that any bank you hold your savings account at is FDIC insured. As of today every depositor is insured up to $250,000 per insured institution. If your account has more than $250,000, then you should move some money to a different bank to ensure you will have full insurance coverage.

I STRONGLY suggest you save at least 3-6 months of living expenses into a savings account or a money market account as an emergency fund. What’s a “money market”, you ask? Basically, a money market is another form of a savings account that pays a slightly higher interest rate than a savings but requires a minimum balance to open an account. The details of it are beyond the scope of this text. Just note that saving a minimum of 3 months of your living expenses is essential. Shop around and compare different banks and look at what they can offer you.  Start off small, but always remember to PAY YOURSELF FIRST! Before anyone gets a dollar from you, make sure you give yourself the first dollar.