Insured Savings: Vehicle Protection

Saving vehicles are a type of savings account that can help individuals reach their financial goals. They are a way to save money for the long term, which for most people means retirement. There are different types of savings vehicles, such as Certificate of Deposit and Money Market Accounts, and it is important for individuals to evaluate the different forms based on their needs. For example, a Certificate of Deposit usually requires a high minimum balance and offers a higher interest rate, whereas a Money Market Account has a very high liquidity, low or no interest, and low minimum balance. Through interactive and self-paced lessons, such as Everfi's SaveUp course, individuals can gain the knowledge and skills needed to become informed consumers and make financial decisions about saving vehicles and other types of savings accounts.

Savings vehicles are never insured

There are different types of savings vehicles, including certificate deposits and money market accounts. Certificate deposits are a type of deposit that is held for a specific number of terms. If you withdraw your money before the term is up, you will be penalised. Money market accounts, on the other hand, are a type of deposit account that combines features of both checking and savings accounts. They usually offer higher interest rates but require a high minimum balance and initial deposit.

When choosing a savings vehicle, it is important to evaluate the different forms available and select the one that best suits your needs. For example, if you want to earn as much interest as possible, you should choose an account with compound interest and a high interest rate. If you want easy access to your money, a simple savings account or checking account might be a better option.

It is also important to keep in mind that savings vehicles are not a quick fix for your financial goals. They are generally only useful for long-term investments, so you should be prepared to keep your money in the account for a significant period of time.

Money Market Savings Accounts

A money market account is a type of savings account that may also offer the ability to write a few cheques or make a few debit card transactions each month. They are a good option for those looking for an account to boost savings or for more flexibility to withdraw savings without incurring penalties.

Money market accounts are a safe option at federally-insured banks or credit unions as long as they are within certain limits and guidelines. The Federal Deposit Insurance Corporation (FDIC) insures deposits up to at least $250,000. If the account is with a credit union, the account will likely be federally insured through the National Credit Union Administration (NCUA), also up to at least $250,000.

Money market accounts typically require a higher minimum balance than standard savings accounts. There are no monthly maintenance fees or minimum balance requirements with some money market accounts, and interest is compounded daily. The rate is variable and may change after the account is opened.

Some money market accounts have a monthly fee of around $10 or more if a daily minimum balance, typically $1,000 or more, is not kept. Some accounts also offer a debit card and the ability to write cheques.

The best money market accounts have strong rates and low fees to help grow your bank balance. The average money market rate is less than 1%. However, some accounts offer rates of 4% or more.

Certificate of Deposit

A Certificate of Deposit (CD) is a type of savings account that generally offers a higher interest rate than a traditional savings account. CDs are considered safe investments as they are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) for up to $250,000 per depositor, per bank, for each account ownership category.

CDs are ideal for individuals looking for a guaranteed rate of return that is typically higher than a savings account. In exchange for a higher interest rate, funds are tied up for a fixed period, and early withdrawal penalties may apply. The interest rate on a CD is fixed for the length of the term, and upon maturity, the funds can be withdrawn or reinvested into a new CD.

When choosing a CD, it is important to consider the term length, annual percentage yield (APY), minimum deposit requirements, and potential early withdrawal penalties. CDs typically have term lengths ranging from a few months to several years, and the APY varies depending on the financial institution and the length of the term. Some CDs also offer the option to make additional deposits during the term.

It is worth noting that CDs may not be suitable for everyone as they are illiquid, meaning there is limited access to the funds during the term. However, for those looking to save for long-term goals, CDs can be a great option to maximize returns while keeping their savings secure.

Savings vehicles for short-, mid-, and long-term goals

Saving vehicles are a crucial component of financial planning, enabling individuals to set aside money for various short-, mid-, and long-term goals. These goals can range from emergency funds and vacation expenses to significant investments like purchasing a car or a home. Here's a detailed look at the different types of savings vehicles for each timeframe:

Short-Term Goals

Short-term financial goals are those that can be achieved within a year. Examples include establishing an emergency fund, saving for a specific purchase, or paying off a small debt. To effectively save for short-term goals, it's essential to maintain liquidity and accessibility. Here are some savings vehicles to consider:

• Certificates of Deposit (CDs): CDs are a type of savings account that offers a fixed interest rate for a specified period, usually a few months to several years. They are suitable for short-term goals as they provide a guaranteed return and are FDIC-insured.
• Money Market Accounts: These accounts often provide higher interest rates than traditional savings accounts and come with features like checks and a debit card. They are a good option for short-term savings, but it's important to consider any deposit requirements and withdrawal restrictions.
• High-Yield Savings Accounts: With the rise of online banking, many financial institutions now offer high-yield savings accounts that can provide interest rates significantly higher than traditional savings accounts. These accounts are easily accessible and are suitable for short-term savings goals.
• Cash Management Accounts: These accounts combine features of checking and savings accounts, offering competitive interest rates and minimal to no fees. They are a good option for individuals looking for flexibility and easy access to their funds.

Mid-Term Goals

Mid-term financial goals typically have a timeframe of one to five years. Examples include paying off larger debts, such as student loans, saving for a down payment on a home, or planning for home renovations. Here are some savings vehicles to consider for mid-term goals:

• Traditional Savings Accounts: These are the most common type of savings accounts and are suitable for mid-term goals. They offer easy access to funds and often come with features like ATM cards and a limited number of transactions.
• Money Market Accounts: As mentioned earlier, these accounts can also be used for mid-term goals, providing higher interest rates and the convenience of a debit card and checks.
• Certificates of Deposit (CDs): CDs are also suitable for mid-term goals, especially if you are certain you won't need to access the funds during the specified term. They offer guaranteed returns and can be used in a laddered strategy to take advantage of rising interest rates.
• Bonds: Bonds are loans made to companies or governments, and they offer a steady stream of income through interest payments. Short-term bond funds are a good option for mid-term goals as they provide a balance between moderate risk and moderate returns.

Long-Term Goals

Long-term financial goals are those that are at least five years away. Examples include saving for retirement, funding a child's education, or purchasing a vacation home. Here are some savings vehicles to consider for long-term goals:

• Retirement Accounts: Accounts like 401(k)s, IRAs (Individual Retirement Accounts), and Roth IRAs offer tax advantages and are specifically designed for long-term savings goals like retirement. These accounts often come with restrictions on early withdrawals, making them ideal for long-term commitments.
• Brokerage Accounts: If you've maxed out your retirement account contributions or have long-term goals beyond retirement, a taxable brokerage account can be a good option. These accounts offer more flexibility in terms of contributions and withdrawals but don't provide the same tax benefits as retirement accounts.
• Equity (Stock) Index Funds: These funds track a specific stock market index, aiming to match its performance. They are a good option for long-term goals as they provide diversification and the potential for higher returns over time.
• Exchange-Traded Funds (ETFs): ETFs are similar to mutual funds and are traded on stock exchanges. They offer diversification, low minimum investments, and tax efficiency, making them suitable for long-term goals.

Savings vehicles for emergency funds

It is essential to have an emergency fund to cover unexpected expenses such as medical bills or home repairs. The recommended amount to save is three to six months' worth of living expenses, although some sources suggest aiming higher if your job is unstable, you have family members with significant health issues, or you are solely responsible for all your bills.

When it comes to choosing a savings vehicle for your emergency fund, there are several options to consider:

High-Yield Savings Accounts

High-yield savings accounts are ideal for emergency funds as they offer competitive interest rates, currently earning yields that outpace the rate of inflation. Top high-yield savings accounts commonly earn 5% or greater. Online-only banks tend to offer higher interest rates than traditional banks, with some paying rates as high as 4.75% APY. Examples include Ally, CIT Bank, SoFi, American Express High Yield Savings, and Barclays Online Savings Account. These accounts usually come with a limit of six withdrawals per month and may have minimum deposit and balance requirements.

Money Market Deposit Accounts

Money market accounts offer easy access to your money and often include benefits such as a debit card and the ability to write checks. They also provide competitive interest rates and insurance coverage from the FDIC or NCUA. However, transfers from a money market account may take one to two days, so it is advisable to keep a portion of your emergency fund in an account with more immediate access.

Bank or Credit Union Savings Account

Opening a savings account at your primary banking institution can simplify your financial life by keeping all your accounts in one place. Credit unions, however, are often only open to those in a specific community or geographic area. While banks typically offer their products to everyone, credit unions distribute their profits among their members. The downside of keeping your emergency fund in a traditional bank or credit union savings account is the potential sacrifice of earning interest, as these institutions may offer lower yields compared to online-only banks.

Money Market Mutual Funds

Money market mutual funds are another relatively safe option for emergency funds, although they do not offer insurance protection. They are low-risk and easily accessible, but the interest earnings are typically low.

It is important to avoid keeping your emergency fund in a checking account or a certificate of deposit (CD). Checking accounts offer little to no interest, and CDs charge a penalty for early withdrawal, which may not be feasible in an emergency.

Frequently asked questions