Savings are money that has been set aside for future use. You might save money for college or higher education, for a big purchase like a house or a car, retirement, or for an emergency fund. 

Financial Institutions

But where will you put your money for saving? A financial institution is a business that offers and sells financial services to people. This could be a commercial bank (Bank of America, Chase, etc.) or a credit union (Star One, Keypoint, etc). 

A credit union is a member-owned nonprofit financial institution. While banks are open to the general public, credit unions have membership requirements, for example your location or occupation, that help them provide personalized financial services. Both commercial banks and credit unions offer basic services such as checking accounts, saving accounts, financial advice, loans, ATMs, etc.

A commercial bank is FDIC (Federal Deposit Insurance Corporation) insured for up to $250,000. This means that in case of a bank failure, the FDIC makes sure that depositors receive their insured funds promptly. If you have multiple accounts at the same bank, you could be insured for more than $250,000 if the accounts fall into different categories (e.g., individual, joint, retirement accounts). Similarly, credit unions are insured by the NCUA (National Credit Union Administration) the same way.

Types of Accounts

Savings accounts are bank accounts designed for depositing money to earn interest over time, providing a safe place to store funds while growing them. They typically offer lower interest rates compared to investment accounts but provide higher liquidity and security. Savings accounts are ideal for building an emergency fund or saving for short-term goals.

A checking account (or share account at credit unions) is an account where you can make cash deposits and withdrawals. Checking accounts provide a debit card, checks writing, and ATM access. However, checking accounts usually don’t pay interest, but provide frequent transactions, making them essential for daily use.

Money market accounts combine features of savings accounts and checking accounts, offering higher interest rates and limited check-writing abilities. They usually require a higher minimum balance and provide a competitive yield on deposits, making them suitable for those looking to earn more interest while maintaining liquidity.

Certificate of Deposit (CD) accounts are time-deposit accounts offered by banks, where money is locked in for a fixed amount of time in exchange for a higher interest rate. They are ideal for those who do not need immediate access to their funds and seek predictable returns. Withdrawing money before the maturity date usually results in a penalty, making them suitable for long-term savings goals.

A Roth IRA (Individual Retirement Account) is a retirement savings account that offers tax-free growth on your investments and tax-free withdrawals in retirement. You contribute to a Roth IRA with after-tax dollars, but your money grows tax-free. Once the account is open, you can contribute up to the annual limit set by the IRS, which varies based on your age and income. It's important to choose investments that align with your risk tolerance and retirement goals, such as stocks, bonds, etc., and to regularly monitor and adjust your portfolio as needed.

A 401(k) is an employer-sponsored retirement savings plan that allows employees to contribute a portion of their pre-tax salary to a retirement account. These contributions reduce your taxable income for the year, and the funds in the account grow without tax until withdrawal. Many employers offer matching contributions. To use a 401(k), you need to enroll in your employer’s plan, decide how much of your salary to contribute, and select investment options such as stocks, bonds, or mutual funds.

The difference between 401(k) and IRA is that the 401(k) plan is offered by employers, while IRAs are offered by banks and other financial institutions.

Strategies

A common strategy regarding saving is the 50-30-20 rule. This rule involves splitting your after tax income into three categories: 50% towards needs, 30% towards wants, and 20% towards savings. Needs include housing, utilities, groceries, and transportation. Wants include entertainment, hobbies, and dining out. The amount towards savings can be allocated towards repaying debt, saving for a big purchase, or building an emergency fund.

An emergency fund is a cash reserve that is set aside specifically for unexpected expenses, for example, during a medical emergency, job loss, or urgent repairs. This fund is crucial so that you never end up in a situation where you have to resort to high-interest debt or selling investments to cover the costs.

Another trap banks often set are bank fees. One example is the overdraft fee. If you have overdraft coverage, when you try to use a debit card to pay for a transaction but you don’t have enough money, the bank will pay for you, but you have to pay the overdraft fee. However, this can be easily avoided through opting out of overdraft coverage and watching your bank account balance regularly.