The most basic way to save money is in a savings
account at your bank. Savings accounts come in two flavors, passbook
and statement. You don't usually get to pick; most banks carry one
or the other.
Passbook vs. statement savings
With a passbook account you're given a booklet to
enter deposits, withdrawals and interest. With a statement savings
account you simply receive a statement, usually once a month, detailing
transactions. These "deposit" accounts are insured up
to $100,000 by the Federal Deposit Insurance Corporation (FDIC)
or the National Credit Union Share Insurance Fund (NCUSIF) at a
At a glance
Savings accounts are liquid, meaning you can get your money out
at any time. Federal regulations limit you to six electronic, telephone
or preauthorized transfers per month and no more than three of them
can be by check, draft or debit card. But, generally, you can make
unlimited withdrawals by teller or ATM. There's always a caveat
-- some banks allow only three free withdrawals per month unless
you carry a high balance, i.e. $2500 or more. Be sure you understand
the bank's policies before opening an account.
The minimum balance required to open a savings account is usually
quite low, sometimes just $1 or $5, but don't let that fool you.
Many institutions require a minimum balance of $100, $300 or more
to avoid paying a monthly maintenance fee. Those fees can be stiff,
$5 or even $10 a month, and will erode your money quickly.
The interest earned on a savings account is where
you can make a big difference to the bottom line. Most traditional
banks pay very little interest on savings accounts, a quarter
of a percent is common. You can do much better by using one of the
high-yield savings or money
market accounts that, typically, are found online. High-yield
money market accounts allow you to write checks, while high-yield
savings accounts don't have that feature. However, some high-yield
savings accounts let you link to your checking account to make deposits
and withdrawals easier.
Opening an account online is easy but it may not be
the way to go for everyone. Some people aren't comfortable putting
confidential information online, some want a local branch that they
can walk into and talk with someone face-to-face if there's a problem
with their account. But it may be worth getting past some of the
qualms if you have, or plan to build, a significant savings account.
A savings account can be a great place to build and
keep your emergency fund. Everyone should have enough cash on hand
to see them through three to six months of unemployment. An emergency
fund can also be used to see you through a true emergency: Getting
your only car running again is an emergency, replacing a broken
television is not.