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Main story: Enhance your passbook savings
Which savings method is right for you?

Enhancing your savingsConventional wisdom suggests that we keep three to six months salary in reserve for living expenses in the event of sudden job loss, unexpected illness or other emergency.

This by no means suggests that we should park our nest egg in a conventional, low-interest-bearing savings account, however. More and more, consumers are breaking out their savings into separate functional funds in order to optimize their interest income while still providing peace of mind.

In broad terms, here's how to do it:

Begin by estimating your monthly living expenses. Next, depending on your resources and financial stability, estimate how much you will need to weather an unexpected financial setback. This is the peace-of-mind amount you want to have in savings at all times.

Using that figure, decide what portion of it you would like to have immediately available, no strings attached. That amount might best go into a passbook or statement savings account, again depending on your situation. Remember, you want complete liquidity on this part of your savings.

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Profitable savings
The remainder may be more profitably saved in several ways. You may want to put it into a money market account if the sum meets minimum balance requirements and you want some access to this money. You may want to put half in an MMA and the rest in CDs, which will earn significantly higher interest, if liquidity is not an issue. Or you may purchase several relatively short-term CDs at weekly or monthly intervals so that each matures on a scheduled basis, providing access to those funds at a comfortable interval.

Regardless of which savings method or methods you choose, start by discussing your savings needs with your banker. Your total dollar investment in the bank can open doors to a package of services that is right for you.

The table below breaks down the variety of savings vehicles you might want to consider.

Comparing savings vehicles
Type of account
(features)
Advantages
Disadvantages
Passbook account -- Small ledger book is fed into a printer, recording each transaction.
  • Bookkeeping is automatic. No need to remember or justify transactions
  • No or low minimum balance required.
  • Money is readily available.
  • Banking may be limited to branch transactions during banking hours.
  • Passbooks can be lost or stolen.
  • Interest rates are low compared to other programs.
Statement account -- Customers receive by mail monthly or quarterly statements detailing deposits, withdrawals and other account information.

 

  • No passbook needed; withdrawals normally only require driver's license or other ID.
  • Low or no minimum balance required.
  • Accounts often offer ATM cards, making after-hours banking possible.

 

  • Customer must do some record keeping to know current balance.
  • Interest rates are only slightly better than passbook accounts.
Money market account, including high-yield MMAs -- A liquid, FDIC-insured account that offers higher interest than traditional savings accounts but limits account activity
  • Best of both worlds: higher interest with continued liquidity.
  • Flexibility: banks often package MMAs with checking accounts and CDs, resulting in lower initial deposits and/or additional features such as free checking.
  • Tiered MMAs provide higher interest earnings at higher levels of deposit.
  • Requires higher initial deposits and minimum balances to avoid fees.
  • Restricts withdrawals/transfers to six monthly, three of which may be checks.
Money Market Mutual Fund -- Rates higher than traditional savings and even higher than high-yield MMAs.
  • Fully liquid.
  • Competitive rates
  • Check writing and other privileges that come with a traditional MMA.
  • Not FDIC-insured.
  • Rate is not fixed (but is traditionally consistent).
Certificate of deposit -- A non-liquid, FDIC-insured time deposit
  • Highest interest rates of FDIC-insured products.
  • No liquidity during the term of the CD.
  • Interest rate is locked.
  • Substantial penalty if cashed in prematurely.

 

Related information:
More savings news
Search the latest savings rates
The basics: Savings
Definitions: Banking terms

-- Posted: Oct. 29, 1999

 

 



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