How Many Savings Accounts Do You Need?
Savings accounts are designed to help you earn a little interest on your nest egg at virtually no risk to you. Banks, credit unions and online financial services like ING Direct (Stock Quote: ING) offer free and low-cost savings accounts for a variety of deposit amounts. Some have minimum balances that must be met, while others allow you to save what you can at no cost.
How many accounts you have depends on your needs. Most experts recommend at least one savings account that includes an eight to 12-month emergency fund. Beyond that, you can have an array of accounts that are set up for individual purposes (college savings, emergency fund, vacation costs, etc.). Having separate accounts for each major financial investment is an easy way to know exactly how close you are to your goal at any given time.
Which you chose depends on your individual savings style, the interest rate you can get and the amount of money you have to save. Here are some things to keep in mind while you’re setting up your savings plan:
FDIC Insurance Limits
Currently, the Federal Deposit Insurance Commission (FDIC) insures savings accounts up to $250,000 per account through December 31, 2009. As of January 1, 2010, this amount will go back down to $100,000 per account. You can have as many accounts as you like, but you should keep no more than this amount in any one account in case of bank failure. While multiple accounts may seem tedious, losing hundreds of thousands of dollars when your bank goes under is a much graver predicament.
Always Get the Best Interest Rate
It pays to compare savings accounts to get the most for your money. And be sure you are comparing apples to apples here – there is a difference between APR (Annual Percentage Rate) and APY (Annual Percentage Yield), so make sure you looking at these details closely. APY takes into account compounding interest, while APR does not.
High-yield online savings accounts are traditionally much more lucrative than standard bank savings accounts, with rates hovering between two and three percent on average. This is a vast improvement from the fraction of a percentage point that is offered at most franchise banks. You can also easily invest in other savings products with online banks, including CDs and money market accounts.
Automatic Savings Plans
You might also consider setting up an automatic savings plan to help you save even when you’re not thinking about it. You can specify how much to transfer from your checking to your savings account on a date that is convenient for you. Most people set up auto transfers on the same day as direct deposits so that the money is taken out at the peak of monthly income. Even if you conduct transfers manually each month, it is always a good idea to do this immediately after you receive your paycheck so that you transfer the maximum amount available.
—For more ways to save, spend, invest and borrow, visit MainStreet.com.