OK, so the title of this blog may be a trick question. Here's why...
Every financial situation is unique, so your "best" way to save may involve a combination of accounts and services. Never fear, though. Your Personal Banker can help you decide which solution is best for you based on your long- and short-term savings goals, current market conditions, and your saving and spending habits.
This week we'll start with the types of accounts you can open to faciliate your savings (and none of them involve piggy banks, digging holes in the back yard, or cutting open your mattress):
"Traditional" Savings Account
Remember the old days when you would bring your "passbook" to the bank, deposit your money, and the teller would stamp your book with your deposit information and the date? (If you never experienced the thrill of keeping a passbook, read more about this now-nostagic piece of banking history here.) Sometimes still referred to as a "passbook" or "traditional" savings account, this is the most basic bank savings option that financial institutions offer.
Traditional savings vehicles allow the depositor to make deposits of any size to an interest-bearing account. Although you can make as many deposits to your account as you'd like, federal regulations limit your number of "non-in-person" (online, mobile or otherwise automated) withdrawals or transfers out to six per month.
Despite this requirement, a traditional savings account is the most flexible savings option and a great choice for those just starting to save money or those who may need quick access to the funds in the account. Because of this easy accessibility, traditional savings often earn the most modest interest rates of other savings vehicles.
Money Market Account (MMA)
Money market accounts offer many of the features of a traditional savings account (certain types of withdrawals are limited by federal regulations to six per month, and deposit frequency and amounts are unlimited) plus some the check-writing and/or debit card options of a checking account (with some limitations). What sets a money market account apart from a traditional savings account are the money market's higher interest-earning potential and (consequently) higher minimum balance requirements at most financial institutions (Bank Independent's Smart Growth program offers MMA depositors a great alternative to a high opening/minimum balance).
The concept of a Christmas Club account was first offered in the early 1900s, but gained popularity during the Great Depression as a way to encourage families to start saving money in advance for Christmas expenses. Now sometimes dubbed "holiday" or "vacation" club accounts, this type of account isn't really a club at all. However, it is quite different from a traditional savings account and is still a great idea to ensure you have cash on hand for holiday purchases and to avoid utilizing other sources (loans or credit cards, for example) that will mean paying for the holidays throughout the following year.
Financial insitutions usually set aside a certain window of time during which a depositor can open a Christmas Club account for the upcoming holiday season. Opening balance requirements are usually low, as are, unfortunately, interest rate earnings. Although you can make unlimited deposits into a Christmas Club account--weekly or monthly automated deposits are encouarged--withdrawals are usually not allowed. In fact, the only way to withdraw funds from your Christmas Club account is usually to close the account entirely.
For some people, this is exactly why a Christmas Club is a great option. Saving money definitely takes discipline, and knowing that deposits are going in automatically and the balance can't be touched until the holidays truly dispels the temptation to take a little out here and there throughout the year. Christmas Club funds are typically dispersed in a lump sum (including interest earned) in November or December either by direct deposit into another designated account or by check. It's like a Christmas present for your budget!
Certificate of Deposit (CD)
If you don't need immediate access to your savings and would like to earn a higher interest rate than you might on a traditional savings account or money market, you'll want to look into a certificate of deposit. A CD will have a fixed maturity date and a fixed annual percentage yield (APY) which typically increases as your term (or the time period your money is held in the CD) increases.
Your CD term and interest options will vary from one financial institution to another and are usually competitive; although rates are largely dictated by market conditions, sometimes banks or credit unions will offer special promotional CD rates (like these) to encourage deposits.
One big consideration you should seriously consider is your potential need for the funds, as CDs most always carry a penalty for withdrawal before the maturity date. Ask your Personal Banker for early withdrawal details before opening your CD.
Individual Retirement Account (IRA)
Of all of the savings options we've discussed, an Individual Retirement Account probably involves the most thoughtful discussion and planning. As the name implies, an IRA is opened at a financial institution by an individual to use for retirement planning and is not sponsored or contributed to by an employer, like a 401(k) retirement plan would be. Thus, an IRA is a good option for those who don't have (or want something in addition to) a company-sponsored plan.
An IRA offers great long-term earning potential, and can also provide the depositor with certain tax breaks. Conversely, there are certain federal restrictions surrounding on both contributions and withdrawals (especially withdrawals prior to retirement) that should definitely be discussed with your Personal Banker. There are several different types of IRAs, too, with different eligibility options for individuals, some which are based on employment status and income level.
Now we know an IRA from an MMA...but having the account is just the first step to saving. Now we have to make it happen! Next week we'll talk about easy ways to start building balances to meet your ultimate saving goals.