wisdom suggests that we keep three to six months salary in
reserve for living expenses in the event of sudden job loss,
unexpected illness or other emergency.
This by no means suggests
that we should park our nest egg in a conventional, low-interest-bearing
savings account, however. More and more, consumers are breaking
out their savings into separate functional funds in order
to optimize their interest income while still providing peace
In broad terms, here's how to do it:
Begin by estimating your monthly living
expenses. Next, depending on your resources and financial
stability, estimate how much you will need to weather an unexpected
financial setback. This is the peace-of-mind amount you want
to have in savings at all times.
Using that figure, decide what portion
of it you would like to have immediately available, no strings
attached. That amount might best go into a passbook or statement
savings account, again depending on your situation. Remember,
you want complete liquidity on this part of your savings.
The remainder may be more profitably saved in several ways.
You may want to put it into a money market account if the
sum meets minimum balance requirements and you want some access
to this money. You may want to put half in an MMA and the
rest in CDs, which will earn significantly higher interest,
if liquidity is not an issue. Or you may purchase several
relatively short-term CDs at weekly or monthly intervals so
that each matures on a scheduled basis, providing access to
those funds at a comfortable interval.
Regardless of which savings method or
methods you choose, start by discussing your savings needs
with your banker. Your total dollar investment in the bank
can open doors to a package of services that is right for
The table below breaks
down the variety of savings vehicles you might want to consider.
Type of account
account -- Small ledger book is fed into a printer,
recording each transaction.
- Bookkeeping is automatic. No need to remember or
- No or low minimum balance required.
- Money is readily available.
- Banking may be limited to branch transactions during
- Passbooks can be lost or stolen.
- Interest rates are low compared to other programs.
account -- Customers receive by mail monthly or quarterly
statements detailing deposits, withdrawals and other account
- No passbook needed; withdrawals normally only require
driver's license or other ID.
- Low or no minimum balance required.
- Accounts often offer ATM cards, making after-hours
- Customer must do some record keeping to know current
- Interest rates are only slightly better than passbook
account, including high-yield MMAs -- A liquid, FDIC-insured
account that offers higher interest than traditional savings
accounts but limits account activity
- Best of both worlds: higher interest with continued
- Flexibility: banks often package MMAs with checking
accounts and CDs, resulting in lower initial deposits
and/or additional features such as free checking.
- Tiered MMAs provide higher interest earnings at
higher levels of deposit.
- Requires higher initial deposits and minimum balances
to avoid fees.
- Restricts withdrawals/transfers to six monthly,
three of which may be checks.
Mutual Fund -- Rates higher than traditional savings
and even higher than high-yield MMAs.
- Fully liquid.
- Competitive rates
- Check writing and other privileges that come with
a traditional MMA.
- Not FDIC-insured.
- Rate is not fixed (but is traditionally consistent).
of deposit -- A non-liquid, FDIC-insured time deposit
-- Posted: Oct. 29, 1999