Saving is important. But how to save and where to save is even more important. Throughout this blog, I place a big emphasis on saving money, that is because without saving, the path to become financially independent is less clear. Now, I am not saying that saving is all that it takes for you to become financially independent.
This is far from the truth. Investing your money, whether in stocks, or in real estate is what makes you rich. But before you start investing, you need to save. You need to put aside cash that is totally liquid, safe, and readily available. You simply do not want to risk investing your hard earned money unless you are in a financial position to do so. Even if you are in a better financial position to invest, you still need to have a lot saved, just as a safety cushion to fall back on.
There are a lot of options for parking your cash, like CDs, checking, money market funds, savings account, etc. A savings account is better choice to store your hard earned money. Unlike CDs, there is no penalty for withdrawing your money. It’s convenient, totally liquid, safe and gives a good return. Do not stash it under your bed. It needs to be in an interest bearing account where your money will earn interest and grow.
Here are four questions to ask when shopping for a savings account:
1. Is It Safe?
The first question to ask when shopping for a savings account is SAFETY. Most banks are protected by the FDIC (Federal Deposit Insurance Corporation). The FDIC is a government insurance program that protects each account up to $100,000. But if a bank is in financial trouble, it can take you a long time to recover your money. So avoid institutions that offer insane high rates. Usually these banks are in financial difficulties and are simply offering these high rates to get you in the door.
2. How Much Interest Will I Earn?
The second question to ask when shopping for a savings account is COMPOUND INTEREST. The goal of your savings account is to grow your money by earning compound interest. Online savings accounts usually give higher interest than traditional accounts.
3. Is It Convenient?
The third question to ask when shopping for a savings account is CONVENIENCE. Your savings account should give you a convenient way to save your money and withdraw your money. It should allow you to save automatically, meaning that each month a certain amount of money can be transferred from your checking account to your savings account.
4. Is it Liquid?
The fourth thing to look for is LIQUIDITY. Just as it should be convenient, your saving account should be liquid, meaning that you should be able to withdraw your money at any time you want . So, do not invest your savings in investments that take time to sell.
In short, before putting your hard earned money into a savings account, find out whether it is convenient, totally liquid, safe and gives a better return.
Do you agree? Why or Why not? Share your thoughts in the comment below.