Whether you’ve spent a few years or several decades diligently stashing away money for a big purchase, or even for retirement, be careful about where you keep those savings.
Since most savings accounts pay less than 1% interest and therefore don’t provide huge returns, you might be tempted to simply dump your savings into a checking account for convenience. That way, you’ll avoid the hassles of having to manage two separate accounts. Although doing so may seem like a harmless move, many experts warn against it because it heightens the risk that you’ll spend what you meant to leave untouched.
And that means you’ll be left empty-handed when you need that money most.
“The last thing you want is your savings sloshing around with your spending money,” says Stephanie Genkin, a financial planner who teaches investing basics at New York University.
“Not only do I believe that savings and spending money should be kept in separate accounts, I think it’s best to keep these accounts at two separate banks,” she says. “This way, the two don’t meet, except with some effort.”
Consumers should view their savings not as a vehicle for making money, but rather as a resource that can be tapped in the future, says MaryEllen Miller, a financial consultant in San Antonio.
“Earning interest on savings is nice, but the bigger issue is actually committing to the savings,” Miller says. “For most people, if the money is in their checking account, even if they mentally earmark it for savings, it is way too easy to spend.”
Online banking options
Online banks serve as alternatives to bricks-and-mortar banks and credit unions and may pay interest at slightly higher rates. Some offer savings accounts with interest rates around 1% and very low or no minimum balance requirements.
You also might want to give a look to certificates of deposit, or CDs, for money you plan to hold onto for a longer period of time. These accounts — called share certificates at credit unions — require you to leave the money alone for terms that can run from a month to five years or more, but they usually pay a higher rate of return in exchange. The best CD rates hover around 1.85% for those with terms of four years. The downside is that you could pay penalties for withdrawals before the term expires.
People who want to earn a greater return on their money are better off investing it than waiting for interest on their savings balances to build, says Elle Kaplan, chief executive of LexION Capital, a fiduciary wealth management firm in New York.
“To grow your wealth so that it can work for you, invest in the financial markets. Time is on your side, so the earlier you start, the better,” Kaplan says. She likens keeping money in savings accounts to “modern-day mattress stuffing.”
Keep in mind, though, that investing comes with transaction costs, no guarantee of earning anything and a greater risk of loss; savings accounts, on the other hand, are insured for up to $250,000, and fees tend to be minimal. Those who have accepted these risks to invest in things like equity index funds have generally done well since U.S. stock markets touched lows in March 2009.
If you plan to invest some of your savings, Kaplan says it’s crucial to build an emergency fund before you start. It should hold enough to cover three to six months of living expenses. She also says to make sure that you’re free of high-interest debt before tackling the stock market.
The bottom line
Combining savings and checking accounts may end up backfiring. Instead, experts say that keeping the two separate is a wiser way to go. Online banks and CDs can be viable alternatives if you want slightly higher returns. And if you’re willing to be more adventurous, consider investing, but only if you’re debt-free and have a rainy-day fund in place.
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